Fueled by the stepped-up pace of offshore oil and gas
exploration and drilling activity, deepwater equipment maker
Dril-Quip has been enjoying a healthy growth spurt.
) has logged double-digit profit growth in all but one of the
past seven quarters. And if Wall Street is on the money, it will
stay on the fast track. Analysts polled by Thomson Reuters see
full-year earnings climbing 41% to $4.16 a share. They expect a
31% rise in 2014 and an 18% increase in 2015.
Dril-Quip makes offshore drilling and production equipment,
which is well suited for use in the harsh deepwater environment
and severe service applications. Almost all its products are
geared for use in water more than 1,000 feet deep. They're used
by major integrated, large independent and foreign national oil
and gas companies in offshore areas throughout the world.
What's spurring the uptick?
"It's being caused by the proliferation of deepwater drilling
on a global basis, and in particular the rebound in deepwater
activity in the Gulf of Mexico," Barclays analyst James West told
IBD in an email interview. "Deepwater drilling continues to
increase in every deepwater market around the world, driven by
strong commodity prices and the desire of the integrated oil
companies and national oil companies to discover new
Subsea equipment is anything connected to the seabed.
Dril-Quip also makes surface equipment, used mainly for flow
control on offshore production platforms. It makes offshore rig
equipment, too. Its products are used to explore for oil and gas
from offshore drilling rigs, such as floating rigs and jack-up
rigs, and for drilling and production of oil and gas wells on
Its broad product line includes products such as mudline
hanger systems used in jack-up drilling operations to support the
weight of various casing strings at the ocean floor while
drilling a well.
All subsea-related products are in high demand globally, says
West, and this is especially true for Dril-Quip's wellheads.
According to a company filing with the Securities and Exchange
Commission: Subsea wellheads are pressure-containing forged and
machined metal housings in which casing hangers are landed and
sealed subsea to suspend casing (downhole pipe). As drilling
depth increases, successively smaller diameter casing strings are
installed, each suspended by an independent casing hanger. The
wellheads are utilized when drilling from floating rigs.
West says Dril-Quip is the leading provider of subsea
exploration wellheads to the offshore industry.
"The company is vertically integrated, which allows them to
control product reliability and quality at every step of the
manufacturing process," he adds.
A telling sign of the accelerated pace of deepwater
exploration and discovery came with an announcement fromBP (
) on Dec. 18.
The oil and gas company giant said it has made a "significant"
oil discovery at its Gila prospect, which it co-owns
), in the deepwater U.S. Gulf of Mexico. This is BP's third
discovery in recent years in the emerging Paleogene trend in the
Gulf of Mexico and reflects its ongoing commitment to the U.S.
offshore region, BP said in a press release.
The well was drilled to a total depth of 29,221 feet. BP's
Gila discovery could be good news for Dril-Quip, which already
counts BP among its customers.
In October, Dril-Quip announced a frame agreement with BP
International for the supply of subsea wellhead equipment and
related services. The contract provides the terms and conditions
for worldwide call-off orders placed by BP for Dril-Quip's
BigBore II-H series subsea wellhead systems. Orders previously
placed by BP during 2013 were also governed by the terms of this
contract. BP also has an option to extend the contract for an
additional five-year period.
Dril-Quip, which was not available for comment, did not
disclose further details of the BP contract.
In terms of other recent contracts, one of the most notable
ones came in August 2012, when Dril-Quip was awarded a four-year
contract byPetroleo Brasileiro Petrobras (
), Brazil's national oil company. At exchange rates in effect at
the signing date, the contract was valued at $650 million, net of
Brazilian taxes, if all the equipment under contract is ordered,
says the company's most recent 10-Q SEC filing.
To date, Petrobras has ordered $138 million in equipment from
the $650 million Petrobras contract, West wrote in a Nov. 1
"We still expect this to reach around $160 million by the end
of the year," he said. "While there are no imminent large
projects on the horizon, DRQ continues to see significant
opportunities for smaller higher margin projects."
Backlogs And Bottom Line
Overall, Dril-Quip is faring handsomely on the financial
front. In the most recent third quarter, earnings surged 44% to
$1.12 a share. Revenue rose 18% to $224.7 million.
Increasing levels of deepwater drilling have driven the
company's backlog to record levels, West says. Dril-Quip's
backlog at Sept. 30 was about $1.15 billion, compared with about
$747 million a year earlier.
A number of forces are working together to bolster demand for
Dril-Quip's products, including strong commodity prices and
increased drilling activity.
"As the oil and gas industry continues to recover, the number
of floating rigs (the rig type where Dril-Quip equipment is
normally utilized) actively drilling in the U.S. Gulf of Mexico
continues to increase," the company stated in a 10-Q filing with
As of Sept. 30, there were 36 floating rigs actively drilling
and an average of 36 for the first nine months of 2013, compared
with a yearly average of 29 in 2012 and 18 for 2011.
Dril-Quip's offshore rig equipment includes products such as
drilling riser systems. The drilling riser system consists of
lengths of riser pipe and associated riser connectors that secure
one to another.
Oil Price Impact
Higher oil prices have been helping to drive drilling
activity. In the third quarter, Brent Crude oil closing prices
ranged between $103.19 per barrel and $117.15 per barrel with an
average quarterly price of $110.23. That compares to a range of
$95.28 per barrel and $117.48 per barrel with an average
quarterly price of $109.63 per barrel for the same period in
2012, says the 10-Q.
In its October Oil Market Report, the International Energy
Agency forecast global demand for oil to be 91.0 million barrels
per day for 2013, and to rise to 92.1 million barrels per day in
West is upbeat about Dril-Quip's prospects: "Revenue and
margins have steadily improved," he said. "We expect revenue in
2013 to increase by 20% year-over-year and for gross margins to
rise by almost 200 basis points. We see continued high oil prices
driving demand for deepwater activity and new deepwater rig
deliveries helping to satiate this demand."
Morgan Stanley analysts aren't so upbeat. In a Dec. 1 report,
they lowered the stock's rating to underweight from equal
"DRQ outperformed for several years on a robust exploration
cycle and execution," they wrote. "Going forward, the shift from
exploration to development should weigh on relative performance,
while we see few catalysts for the stock."