Morningstar Inc. (NASDAQ: MORN), a provider of independent investment research, has named Merrill A. (Pete) Miller Jr., CEO of Houston-based National Oilwell Varco, as its 2012 CEO of the Year. Morningstar annually recognizes a chief executive who exhibits exemplary corporate stewardship, demonstrates independent thinking, creates lasting value for shareholders, and has put his or her stamp on an industry.
The two other nominees for Morningstar’s 2012 CEO of the Year award were George Paz of Express Scripts and J. Michael Pearson of Valeant Pharmaceuticals International.
“This year’s nominees have been instrumental in transforming their companies from small players or those with few competitive advantages to leaders in their industries,” said Paul Larson, chief equities strategist and editor of Morningstar StockInvestor. “We selected Miller, who has served as CEO of National Oilwell Varco since 2001, as our winner this year for the rare combination of excellence he’s demonstrated across all three facets of a chief executive’s job—strategic insights, capital allocation, and execution.
“Miller has successfully mitigated the inherent risks of doing business in the oil and gas equipment and services industry. For instance, he executed an acquisition-heavy strategy, which can carry the threat of operational miscues, without a hitch. Despite the pace of acquisitions, Miller has prioritized shareholder-friendly actions by paying a special dividend in 2009, cutting his own salary in light of the difficult economic environment in 2008, and openly sharing his thoughts with analysts about where he thinks the market is going and how National Oilwell Varco is positioned to compete.”
In the last 18 months, continuing a long-running streak of deals, National Oilwell Varco under Miller has completed or has pending nearly $6 billion in acquisitions. In another move that reflects substantial value creation for shareholders, the company also raised $3 billion in senior notes in the midst of an extremely favorable corporate credit environment.
With Miller at the helm, National Oilwell Varco has reshaped the oilfield equipment industry and is positioned to maintain its influence:
• After an impressive string of deals mostly led by Miller over the last 15 years, National Oilwell Varco has become a critical player in the industry, with such leading technology and services that many drillers are electing to standardize around its equipment.
• Miller successfully predicted several major industry shifts—the aging of global rig fleets, the onset of shorter lifecycles for equipment necessary to exploit North American oil and gas reservoirs, and the need for floating production storage and offshore (FPSO) units used for offshore markets—and invested billions of dollars in capital to situate National Oilwell Varco favorably ahead of them.
• The company’s footing uniquely positions it to become one of the leading suppliers for FPSO and related subsea efforts, a development likely to unfold over the next decade, replicating its earlier success with offshore drilling in terms of market penetration and approach to equipment standardization.
“National Oilwell Varco is one of the very few companies in Morningstar’s coverage universe with a Wide ‘Economic Moat’ Rating, a Positive Economic Moat Trend, and an Exemplary Stewardship Rating,” Larson added. “We don’t award moat ratings based on operational effectiveness or skilled management, but we do acknowledge that they can strengthen a firm’s moat. Miller’s actions, along with those of his management team, have indeed steeled National Oilwell Varco’s competitive position by changing the way offshore rigs are built to the company’s benefit, solidifying its low-cost position in the industry as drillers standardized around its products to take advantage of improved rig economics. Meanwhile, National Oilwell Varco reaped the benefits of powerful switching costs through the integration of its equipment into a single operating system.”
Morningstar’s Economic Moat™ rating is a proprietary measure of a company’s sustainable competitive advantages, and Morningstar assigns each company a rating of Wide, Narrow, or None. A company can obtain an economic moat through five primary sources: Efficient Scale (a limited market where there is little incentive for new entrants), Network Effect (a situation where incremental customers add value for existing customers), Cost Advantage (allowing a company a greater profit margin and/or the ability to steal market share), Intangible Assets (e.g. patents or strong brands), and Switching Costs (making it costly in time and/or money for customers to switch providers). Morningstar also evaluates a company’s “moat trend,” which indicates whether the economic moat of its underlying businesses is strengthening or weakening.
Morningstar introduced its CEO of the Year award in January 2000. Winners are chosen by senior members of Morningstar’s equity analyst team based on their in-depth independent research.