With sentiments bearish for the oil and gas industry, energy stocks and all related industry stocks have slumped in the last 6-9 months. While the decline in oil and gas prices has exposed companies with high leverage to more trouble, the decline in energy prices has also presented some excellent long-term investment opportunities.Ă‚
Dril-Quip (DRQ, Financial) designs, manufactures, sells, and services engineered offshore drilling and production equipment for use in deepwater, harsh environment, and severe service applications worldwide. The company’s key products include subsea well systems, dry tree completion systems and subsea completion systems. In other words, the company has a complete range of service offering for the offshore industry.
Coming to the positive factors, the first reason to be bullish on Dril-Quip is the company’s balance sheet strength. As I mentioned above, the current crisis has exposed companies with high leverage to big trouble. From that perspective, Dril-Quip is well positioned with the company having no long-term debt as of December 2014 and a cash position of $299 million. Therefore, the financial flexibility for the company is high and there are zero concerns related to debt servicing or debt refinancing in difficult market conditions.
The second reason to be bullish on Dril-Quip is steady revenue growth in the last few years. From $601 million in FY11, the company’s revenue has grown to $931 million by FY14. The important point here is that the company’s order backlog has also swelled during the same period. From an order backlog of $716 million in FY11, the company’s order backlog has swelled to $1.2 billion in FY14.
Again, the big positive is that the company’s order backlog has remained unchanged at $1.2 billion at the end of FY13 and FY14. Therefore, even with decline in oil and gas prices, the company has maintained a healthy order book. Considering the current order book, Dril-Quip has a revenue visibility of slightly more than one year considering FY14 revenue.
Another big positive for Dril-Quip is the company’s operating margin development in the last few years. From an operating margin of 21.6% in FY11, the company’s operating margin has swelled to 29.9% as of FY14. The company’s operating margin has swelled due to vertical integration and due to machine rebuilding. Even if operating margin sustains at current levels, it is significant ahead of peers and ensures strong cash flows for the company.
Considering these factors, Dril-Quip certainly looks attractive after a 37% correction in the last one year. The stock is currently trading at an EV/EBITDA of 7.6 and I believe that these are attractive valuations for a zero-debt company with steady revenue growth, robust operating margins and a strong order backlog.
While I don’t expect the offshore markets to recover anytime soon, I do believe that Dril-Quip looks attractive from an accumulation point of view. Investors can consider the stock with a long-term investment horizon. I must add here that the company has authorized a $100 million share buyback program and that will allow further EPS expansion. With the company being debt-free, I expect further value creation through dividends and share buybacks.
