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On Jul 10, Zacks Investment Research upgraded offshore drilling equipment maker Dril-Quip, Inc. (DRQ - Analyst Report), to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Dril-Quip manufactures highly engineered offshore drilling and production equipment for deepwater severe-service applications and harsh environmental conditions. The company designs and manufactures subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors, and associated pipe, drilling and production riser systems, and wellhead connectors and diverters, which are used on offshore rig equipment.

The operating environment and growth prospects seem bright for Dril-Quip, as reflected by the earnings estimates for this leading engineering company. For the second quarter of 2013, the Zacks Consensus Estimate currently stands at 88 cents, reflecting year-over-year growth of 19.52%. The upswing will likely be felt in the third quarter as well given the forecasted 33.05% year-over-year growth and 27.26% full-year 2013 growth.

The momentum was felt earlier too, when Dril-Quip released its first quarter earnings results on May 7. Earnings per share came in at 98 cents, exceeding the Zacks Consensus Estimate of 80 cents by 22.50% and improving 30.66% from 75 cents a year ago. The outperformance was mainly backed by growth in product and service revenues as demand for offshore equipment increased.

With respect to the earnings trend, Dril-Quip delivered positive earnings surprises in 3 of the last 4 quarters with an average beat of 7.02%. The long-term expected earnings and sales growth projections of 14.50% and 6.93%, respectively, are also fairly impressive.

Additionally, Dril-Quip’s first quarter backlog witnessed a 16% sequential as well as 45.8% year-over-year improvement. We also expect large orders in 2013 from the Gulf of Mexico and Brazil, with rising demand and activity levels in these regions. This gives Dril-Quip the financial flexibility to take advantage of growth opportunities while returning capital to shareholders.

Other Stocks to Consider

There are certain other equipment makers in the energy sector that are worth considering. These include Blueknight Energy Partners, L.P. (BKEP - Snapshot Report), Energy Transfer Equity, L.P. (ETE - Snapshot Report), and Gran Tierra Energy, Inc. (GTE - Snapshot Report). All the three stocks carry a Zacks Rank #1 (Strong Buy).   

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