Dril-Quip Inc. (DRQ) reported a 15% year-over-year increase in second-quarter 2008 earnings, driven by higher demand for its offshore drilling and production equipment. The order backlog at the end of the second quarter was about $560 million, a 42% year-over-year increase.
Importantly, the company completed about two-thirds of its recently announced $100 million share buyback program. Overall, Dril-Quip continues to enjoy strong demand for its products and services. We, however, believe that the stock's premium valuation relative to peer group already reflects all the positives concerning the company's leverage to the current oilfield cycle. Our Hold recommendation remains unchanged.
Dril-Quip's fortunes are tied to drilling for oil and natural gas, particularly in deepwater offshore areas. Strong commodity prices have helped strengthen the cash flows of exploration and production (E&P) companies, thereby allowing for higher E&P capital expenditures, which are expected to grow at double digit rates this year and next.
The company is also in excellent financial health, with an almost debt-free balance sheet and significant amount of cash on hand ($109.4 million at the end of second quarter 2008). This gives it the financial flexibility to take advantage of new growth opportunities.
However, the pickup in drilling demand thus far -- particularly in North America -- has been mostly in the onshore area where the company has no presence. In the sub-sea capital equipment area, 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 its larger competitors.
The company's operating margins have been shrinking steadily in the last three/four quarters. The best-case outlook for the company's near-term margins is a stabilizing trend.
Read the full analyst report on DRQ
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