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  • Dril Quip buyout candidate? 4 comments
    Jan 31, 2010 7:54 PM | about stocks: DRQ, FTI, CAM, NOV
    I like Dril-Quip (DRQ).  In fact I've owned it for a little less than a year.  It has a good balance sheet, low debt, two if its three founders are still with the company. Unfortunately one of its three founders passed away late last year.

    Over the past twenty years the firm has not taken on debt (leverage) and has had a conservative strategy to grow its operations.  It has become one of the more admired firms in its sector of deep water drilling. It's main competitors have an on-land and off shore presence, such as Cameron (CAM) and FMC Technologies (FTI).  

     
    AS can be seen, DRQ has 5% of the sub sea market, with players such as Aker Kvaener (high debt), Vetco (part of GE), as well as FTI and CAM. OII is more of a complimentary player than a competitor to DRQ and is also an interesting company to look as an investment.  But the reason why DRQ is a likely candidate has to do with two factors (1) its financials and (2) its owners.

    Financially, the firm has about 1.5 years of backlog, being the only vertically integrated in the sector it has more flexibility with respect to taking in orders and having a longer forecast horizon.  DRQ also has the highest margins in this sector too.

    Thus, if consider its WACC=14.5%, and it can hold onto its 5% market share in the subsea space (which is growing at 10% a year), one can estimate that DRQ's EV will be double its current EV in 5-7 years.




    For a company to purchase DRQ (whether its a complimentary player, another service company looking to enter the sub sea space, or a private equity firm), one could recover its investment in as little as four years (depending on purchase price, etc).  I'm assuming 9x EBITDA multiples in this analysis (and y axis is FCF).  


    Lastly, I would like to mention that with the passing of one of the original founders, the remaining founders may be looking at alternatives for the firm.  What made me write this article was a technical analysis website which was showing NOV breaking out and one of the commentators mentioned that DRQ would be a good fit for NOV.  I've not looked at the possibility of those two (DRQ high tech sub sea vs. NOV offshore piping, drilling), but maybe in future posts if there is any interest from the general public.




    Disclosure: own drq
    Themes: sub sea Stocks: DRQ, FTI, CAM, NOV
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  • camilasdad
    , contributor
    Comments (16) | Send Message
     
    The above article has some date to it however another article surfaced today via Reuters news feeds with some of the similar information. Very interesting and I look forward to learning more about DRQ.
    3 Jun 2010, 08:25 PM Reply Like
  • Osiso
    , contributor
    Comments (56) | Send Message
     
    Author’s reply » yup, i did this last year for a private equity competition, this is a very brief write up of the initial report. key point is that since this report, one of the co founders has passed away and the remaining two are getting up there in age...they must be thinking about retiring
    3 Jun 2010, 08:31 PM Reply Like
  • camilasdad
    , contributor
    Comments (16) | Send Message
     
    Very nice article. The author of the most recent article from Rueters probably needs to extend proper attribution. A death, aging founders, and a very valuable enterprise are all the makings for a buyout.
    Look at the business DRQ is in and the competition. FMC and CAM are those listed on yahoo finance. DRQ are deep water specialists and PBR will be drilling in the deepest waters to bring oil to the world. Without a buyout DRQ still looks good.
    5 Jun 2010, 03:08 PM Reply Like
  • Osiso
    , contributor
    Comments (56) | Send Message
     
    Author’s reply » yup, i bought it last year @ 33-35 and sold day after the flash crash @ 55...looking to get back into it within 6 months. it has dropped what 50% from its high? if it goes under 40 i would start buying
    5 Jun 2010, 03:40 PM Reply Like
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