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

E&P Energy Trust Returns

Top three Canadian E&P energy trusts based on 12 month unit price appreciation/depreciation:

1.Daylight Resources Trust(DAY.UN) +7.5%
2.Crescent Point Energy Trust(CPG.UN) -1.3%
3.Baytex Energy Trust(BTE.UN) -20.9%

In this twelve month period DAY.UN paid C$1.38 in distributions, CPG.UN C$2.64 and BTE.UN C$2.64. During the same period the TSX Capped Energy Index returned -35.3%.

The production profile of these trusts is diverse: CPG's production is 84% light/medium oil, BTE 57% heavy oil and DAY 69% natural gas. Changes in average daily production:
DAY Q4/07: 20 583 boe/d Q3/08: 21 782 boe/d change: +5.8%

CPG Q4/07: 33 351 boe/d Q3/08: 37 630 boe/d change: +12.8%

BTE Q4/07: 39 304 boe/d Q3/08: 42 538 boe/d change: +8.2%

Rig Count

The number of active oil & gas rigs in the U.S. drops by 43 units(5 in offshore). Drilling activity in Canada however increases by 6 rigs from last week.
BH Rig Count

O&G Inquirer: Weak Or Worse: Field Activity Will Likely Decline, Perhaps Steeply

Selected quotes:

"Herring strongly doubts that the oil and gas sector now faces a long 1980s-style spell of poor commodity prices. The repeated downturns of the 1980s and early '90s, in his view, were caused by economic weakness (and thus weak energy demand) coupled to ample energy supplies, especially for natural gas. "Even if the world economy does not expand as rapidly as it has in the recent past, global energy supplies are now much closer to the razor's edge. More oil and gas activity has to occur or there won't be enough supply to meet the demand," the CAODC president comments."

"Furthermore, it's getting harder to tap new oil and gas supplies, which means more work for service companies. "In 2007, the average well took 7.4 days to drill, compared to nine days in 2008. That's a material difference," Herring says. For 2009, the CAODC anticipates that the trend toward more drilling days per well will continue, driven by unconventional gas plays in British Columbia, the Bakken tight oil play in Saskatchewan, and deeper natural gas wells generally."

"According to the Calgary-based consulting firm, a producer requires $9 per Mcf to earn a 15 per cent return on a full cycle basis from newly drilled natural gas wells. (Ziff's figures include $2 per Mcf for drilling; $1.50 for processing, pipe, and other wellhead facilities, $1.25 for operating costs, administrative overhead of $0.50 or so, and $1.75 in Crown royalties.) The Alberta spot gas price this fall was less than $7 per Mcf and now it is below $6. "At that price, a producer suffers a technical loss if its costs are average," Gwozd says."

"The first step in oil and gas development is seismic surveying, and the geophysical sector's health is traditionally seen as a signal of what could be coming for other services in conventional oil and gas. "For our members, 2008 was the worst year in a decade. It was almost unbelievably bad," says Mike Doyle, president of the Canadian Association of Geophysical Contractors [CAGC]. "The first quarter was decent. Then we got hammered by the Alberta government royalty review, the high Canadian dollar [versus the U.S. dollar], and finally the global financial crisis.""

The outlook for North American natural gas producers(and drillers) looks very bleak: domestic and foreign supply is up, consumption is down(at least temporarily), production costs are increasing and these increases are mostly irreversible as they are due to geology. Ironically it looks like only politicians could improve the situation.

Canadian Oil Sands Trust Q4

Net Income C$124 million (-75%)

Net Income per trust unit C$0.26 (-75%)

Operating Costs per barrel C$32.10 (+17%)


The Report

Update:Canadian Oil Sands Trust a buy target?

World's First Drilling FPSO Heads to Congo for Azurite Deepwater Operations

RIGZONE:

"The world's first Floating, Drilling, Production, Storage and Offloading vessel (FDPSO), which is owned by Prosafe Production, has left Keppel Shipyard in Singapore on January 24, 2009. After a short stay at anchorage, it will head for the Republic of Congo where it will be deployed at Murphy West Africa Ltd's (a subsidiary of Murphy Oil Corporation) deepwater Azurite development in the Mer Profonde Sud Block.

In November 2007, Prosafe was awarded a $400 million contract for the conversion and operation of a Floating Drilling, Production, Storage and Offloading unit. Named the Azurite, this first of its kind FPSO with drilling capabilities incorporates a design that is cost efficient and effective for drilling and producing deepwater fields.

The vessel is equipped with a modular drilling package that can be removed and reused elsewhere when the production wells have been drilled. The Azurite has a storage capacity of 1.4 million barrels of oil and a process capacity of 60,000 bfpd/40,000 bopd and will be spread-moored at a water depth of 1,400 meters."

Dockwise

Dockwise Ltd.(OSE:DOCK)

"Dockwise Ltd. is the Bermuda domiciled/resident holding company of the Dockwise group. The Dockwise group of companies comprises four global operating companies that provide specialty services primarily in the heavy marine transport and the oil and gas services industries."

"Dockwise operates in 6 different market segments:
Offshore Structures: all fixed and mobile structures used for the production of Oil & Gas, i.e. jackets, modular topsides, floating production units, SPAR buoy’s, TLP’s and semi-submersible platforms. Drilling Rigs: this segment includes 2 sub segments: jack-up drilling rigs and semi-submersible drilling rigs. Military: all military related transports, i.e. submarines, mine sweepers/hunters, dry-docks, radar platforms and all associated logistics services as well as testing.
Cranes: all container terminal related heavy equipment such as: pre-assembled container cranes, rubber tired gantry cranes, etc. Port & Marine Infrastructure: this segment includes all equipment associated with building and operating of marine infrastructure, i.e. dredging equipment, floating cranes, grain elevators, power barges, transport barges, dry-docks and yard facilities, etc. Yachts: Transportation of luxury yachts."

Market Value: 1.086 billion NOK(~$159 million)

Revenue: 2007: $290.1 million(Heavy lift 86%, Yacht transport 14%) 2006: $252.0 million 2005: $208.3 million

EBITDA 2007: $104.53 million 2006: $101.8 million 2005: $89.3 million

Order Backlog: 30.09.2008 $412 million, 31.12.2007 $233 million

EPS: FY2007: $-0.43

Total Assets(30/09/2008): $1,700 million

Total Liabilities: $1,700 million

Fleet: 14 semi-submersible open deck vessels, 3 Dock-type vessels,4 Yacht Carriers

Top Five Shareholders: INVESCO Asset Management Limited 6.3%,Franklin Templeton Investment Management Ltd.6.3%, ODIN Forvaltning AS 5.4%, Schroder Investment Management Ltd. 2.4%, Wellington Management Company LLP 1.9%

Dockwise was offloaded to the Oslo Stock Exchange by the British private equity group 3i and crude carrier Frontline in 2007. Like most public companies that have recently been in the hands of private equity Dockwise is loaded with debt. All the cash that the company generates is used to pay interest and reduce debt and there are currently no earnings to report.

With the increase in offshore oil exploration and production in the recent years and in the future the transportation of drilling vessels, production installations and large components will grow significantly. The risks of this business are very real and significant, example one and two.
In the end of September the company had a order backlog $412 million including contracts that will be executed in 2014. Great majority of the heavy transport contract are completed months or years prior to the actual transportation, which should provide visibility into the development of Dockwise's business.

Dockwise pr-video(Youtube)

Sunny days for breakbulk(from 2007)

Total heads for the Hills

As it bids for UTS Energy, which has a 20% stake in the Fort Hills tar sand project.

also

Total said it may delay start-up of its Joslyn oil sands project in Canada

Total's move for UTS is interesting as the costs of the Fort Hills project have been sky rocketing and the break-even level for the synthetic crude oil or bitumen to be produced is estimated to be between 45 and 100 dollars per barrel. The only advantage that the tar sands have in the current economic and political environment is their location on soil where property rights are respected. It seems that this single advantage outweighs the large number of disadvantages associated with tar sands(high costs, low yielding products, significant environmental impact etc.).