Dril-Quip

Dril-Quip Inc. (NYSE:DRQ)

"Dril-Quip, Inc. is one of the world's leading manufacturers of precision-engineered offshore drilling and production equipment that is well suited for use in deepwater, harsh environments and severe service applications. The Company designs and manufactures subsea, surface and offshore rig equipment for use by oil and gas companies in offshore areas throughout the world. Dril-Quip also provides installation and reconditioning services as well as rental running tools for use with its products."

"At its world headquarters located in Houston, Texas, Dril-Quip provides in-house forging and heat-treating capabilities. The world headquarters operates one of the largest rough and finish machining facilities in the industry. Dril-Quip also maintains and operates regional headquarter offices and facilities that include full capabilities in Aberdeen, Scotland, Singapore and Macaé, Brazil."

Market Value: $956 million

P/E 8.86

P/B 1.6

Revenues 9M/08: $407.2 million 2007: $495.6 million(equipment sales 84%, services 16%) 2006: $442.7 million 2005: $221.6 million 2004: $221.6 million 2003: $219.5 million

Operating Income(millions) 9M/08: $108.3 2007: $138.4 2006: $122.4 2005: $49.2 2004: $18.3 2003: $14.5

Operating Margin: 9M/08: 26.6%, 2007: 27.9%, 2006: 27.6%, 2005: 22.2%, 2004: 8.3% , 2003: 6.6%


EPS 9M/08:$1.98 2007:$2.63 2006:$2.15 2005:$0.90 2004:$0.36

Balance Sheet on 30/09/2008

Assets
Current 552.6 million
Total $699.8 million

Liabilities
Current 98.4 million
Total 107.4 million

Backlog: 30/09/2008: $528 million,31/12/2007: $429 million, 30/09/2007: $457 million, 31/12/2006: $336 million

Major shareholders: Founders Larry E. Reimert 6.3%, Garry D. SMith 7.7%, J. Mike Walker 10.1%, Goldman Sachs Group 7.3%, Barclay Global Investors 5.14%


Competition (mcap): Cameron ($5.08 billion) P/E 8.37, P/B 2.1(ex-goodwill 3.1), FMC Tech.($3.7 billion)P/E 11, P/B 4.3, NOV P/E 5.66, P/B 1.12(ex-goodwill ~1.5) Aker Solutions($1.2 billion), VetcoGray & Hydril(both are part of GE)

-Dril-Quip manufactures: subsea wellheads, subsea productions trees(market share 4%), production and drilling risers, specialty connectors, mudline suspension systems

-"In 2007, the Company’s top 15 customers represented approximately 51% of total revenues, with no customer accounting for more than 10% of the Company’s total revenues"

-"The Company has substantial international operations, with approximately 66%, 65% and 69% of its revenues derived from foreign sales in 2005, 2006 and 2007, respectively"

-"The Company's manufacturing process is vertically integrated, producing inhouse,majority of its forging requirements and essentially all of its heat treatment, machining, fabrication, inspection, assembly and testing."

Notes: P/B seems low compared to most peers and the balance sheet looks solid. The Brazilian manufacturing operations may be major advantage in the future. The lack of a dividend is a minus, but most of its peers don't pay dividends.
A severe and prolonged global economic down term may slow down the growth offshore oil production, but the long term trend is clear and strong: offshore is the place where the remaining significant deposits are. DRQ could be one of the biggest beneficiaries of Brazil's pre-salt hydrocarbon discoveries.
DRQ's vertical integration has been a big plus in recent years when the demand for subsea equipment has outpaced supply, however if demand falls significantly those inhouse resources become underutilized and turn from an asset into a liability.
The operating margin is at an unsustainable level and will most likely fall in the range of 9 to 15 percent(the five year average for FMC Tech. is 12.12%). Revenue will most likely dip by 20 to 40% during next 18-24 months after which it'll resume on the path of growth and the 2008 level will be surpassed in 2011 at the latest.

FORECAST: Subsea spending to exceed US$80 billion