We are maintaining our Neutral recommendation on the U.S.
equipment supplier
Dril-Quip, Inc.
(
DRQ
).
The company reported impressive second quarter results, fueled by
growth in product and service revenues as demand for offshore
equipment climbed. Dril-Quip enjoys a favorable position in the
industry based on its solid backlog, including an almost debt-free
balance sheet.
Dril-Quip's results are heavily levered with continued strength in
global deepwater drilling markets, especially in South America and
the Asia-Pacific region. Given the operators' long-term outlook on
these projects, deepwater drilling and other related services will
remain relatively stable amid the usual fluctuations in commodity
prices.
We also expect large orders in the balance of 2012 from the Gulf of
Mexico (GoM) and Brazil, with rising demand and activity level in
these regions. This gives Dril-Quip the financial flexibility to
take advantage of new growth opportunities while returning capital
to shareholders.
Increased deepwater activity over the near term, recent capacity
additions in Brazil and Singapore, as well as ongoing capacity
expansions could prove beneficial for the company over time.
Dril-Quip is also pursuing several other large projects -
Royal Dutch Shell plc
's (
RDS.A
) Malakai tension leg platform (TLP) project, off Malaysia as well
as Woodside's TLP projects in Australia. The award of these
contracts is likely to be announced in 2013.
Recently, Dril-Quip clinched a $650 million contract from Brazil's
state-owned energy company
Petroleo Brasileiro S.A.
or
Petrobras
(
PBR
). The four-year contract was much awaited for Dril-Quip, as it
trails the three-year, $180 million contract with Petrobras that
concluded in the second quarter of 2012. The planned investment in
Petrobras in Brazil's offshore market over the next five years will
likely be beneficial for Dril-Quip, which is well positioned to
take advantage of the project.
However, in the subsea capital equipment space, Dril-Quip's
competitive position is fairly weak in the more lucrative large and
complex deepwater segment. Despite its strenuous efforts over the
last couple of years, it has made little headway in gaining market
share from larger competitors.
We also remain concerned about the company-specific risk, which
include: new product growth challenges, potential backlog losses
and high dependency on its top customers. Additionally, delays in
deepwater infrastructure awards may also hinder the growth prospect
of the company.
Dril-Quip has a Zacks #3 Rank (short-term Hold rating).
DRIL-QUIP INC (DRQ): Free Stock Analysis Report
PETROBRAS-ADR C (PBR): Free Stock Analysis
Report
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis
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