We are upgrading our recommendation on offshore drilling
) to Neutral from Underperform.
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 through the usual fluctuations in
commodity prices. The company expects further improvements with
increase in capacity and stepped up activities in the Gulf of
Mexico (GoM). This will enhance order activity, giving our
estimates room for upside, particularly in 2013.
Moreover, recent capacity additions in Brazil and Singapore as well
as the ongoing capacity expansion could prove beneficial over time.
The company also aims to increase its machinist workforce by 30% in
2012 and is on track to meet this goal.
Moreover, the planned investment of
Petróleo Brasileiro S.A.
or Petrobras (
) in Brazil's offshore market over the next five years will likely
prove beneficial for Dril-Quip given the strong and long-standing
association between the companies. Hence, beyond 2012, Dril-Quip
remains well suited for Petrobras' planned newbuilds and continued,
general secular growth. In particular, Dril-Quip is likely to
benefit from the potential renewal of its expiring 3-year, $180
million subsea wellhead contract with Petrobras.
Although Dril-Quip's backlog experienced a sequential downfall, the
company's backlog still remains solid, which provides ample
visibility for its earnings growth and cash flow prospects going
forward. An almost debt-free balance sheet is an added strength. We
also expect large orders in 2012 from the GoM and Brazil, with
growing demand and rising activity level in these regions. This
gives it the financial flexibility to take advantage of growth
opportunities while returning capital to shareholders.
However, in the subsea capital equipment area, Dril-Quip's
competitive position is fairly weak in the more lucrative, large
and complex deepwater segment. Despite its continued efforts over
the last couple of years, it has made little headway in gaining
market share from larger competitors.
DRIL-QUIP INC (DRQ): Free Stock Analysis Report
PETROBRAS-ADR C (PBR): Free Stock Analysis
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