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Dril-Quip Inc. (DRQ - Analyst Report) reported third-quarter 2013 adjusted earnings of $1.12 per share, beating the Zacks Consensus Estimate of $1.06. The quarterly earnings also increased from the year-ago profit level of 78 cents. The outperformance was mainly backed by growth in product and service revenues as well as the increased demand for offshore equipment.
 
The company registered total revenue of $224.7 million in the quarter, up nearly 18% from the year-ago level of $190.9 million. The reported figure was below the Zacks Consensus Estimate of $227.0 million.
 
Operating income grew 36% to $52.0 million from the year-earlier level of $38.7 million. On the cost front, selling, general and administrative expenses rose 43.7% to $29.8 million from the year-earlier level of $20.8 million, while engineering and product development costs increased 12.8%.
 
Backlog
 
As of Sep 30, 2013, the company had a backlog of $1.15 billion compared with $747 million as of Sep 30, 2012.
 
Guidance
 
For the fourth quarter of 2013, the offshore drilling equipment maker expects earnings between $1.04 and $1.14 per diluted share, excluding any unusual or special charges. Additionally, based on improving market conditions, Dril-Quip raised its full-year adjusted earnings per share expectation to $4.10–$4.20 from $3.85–$4.05 guided previously.
 
Going forward, we expect large orders from the Gulf of Mexico (GoM) and Brazil, with a rising demand and activity level in these regions. This gives it the financial flexibility to take advantage of new growth opportunities while returning capital to shareholders.
 
Outlook
 
Dril-Quip registered an impressive gross margin increment both for its products and services divisions. Installation and maintenance work on subsea projects drove margins for the quarter. Capacity addition helped the company accomplish its target for the year. Again, Dril-Quip boasts an impressive balance sheet with effectively no debt and ample free cash flow to fund capital spending. 
 
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 likely remain relatively stable through the usual fluctuations in commodity prices.
 
Zacks Rank
 
Dril-Quip currently holds a Zacks Rank #3 (Hold).  Other stocks in the oil and gas sector such as TransAtlantic Petroleum Ltd (TAT - Snapshot Report), Matador Resources Company (MTDR - Snapshot Report) and Northern Oil and Gas, Inc. (NOG - Snapshot Report) with a Zacks Rank #1 (Strong Buy) are expected to outperform.

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