They boil down the bones from a cow's lower legs ( not the hooves - they make gelatin) and get the oil.
It is called Neatsfoot oil because the oil was reclaimed from oxen in old England, when those beasts were called a "Neat". There is some disagreement if it referred to all horned oxen, or only those who had their horns clipped. Either way, when the bovine was dispatched, every part was reduced to some sort of product.
Today most neatsfoot oil is sold as "Neatsfoot oil compound" which is a blend of 100% neatsfoot oil and petroleum or mineral oils. The 100% stuff is what you want on a raw sheath.