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On Mar 25, 2014, we issued an updated research report on Dril-Quip Inc. (DRQ - Analyst Report). The company posted fourth-quarter 2013 adjusted earnings of $1.15 per share beating the Zacks Consensus Estimate of $1.13. The quarterly earnings also increased from the year-ago profit level of 76 cents. The outperformance was mainly backed by growth in product and service revenues as well as increased demand for offshore equipment. The company registered total revenue of $232.5 million, up 23.3% from the year-ago level of $188.5 million.

The offshore drilling equipment maker – Dril-Quip – is likely to benefit from increased deepwater activity over the near term, recent capacity additions in Brazil and Singapore, as well as ongoing capacity expansion, over the coming years.

As of Dec 31, 2013, the company had a backlog of $1.2 billion compared with $881 million as of Dec 31, 2012. The company also enjoys a favorable position given its solid backlog, including a debt-free balance sheet. In 2014, we expect large orders from the Gulf of Mexico (GoM) and Brazil, with rising demand and higher activity level in these regions. This gives it the financial flexibility to take advantage of new growth opportunities while returning capital to shareholders.
For the first quarter of 2014, the offshore drilling equipment maker expects earnings between $1.10 and $1.20 per diluted share, excluding any unusual or special charges. Additionally, based on current market conditions, Dril-Quip expects full-year adjusted earnings per share at $5.00–$5.20.

However, in the subsea 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 larger competitors.

Additionally, delay in deepwater infrastructure awards may also hinder the growth prospect of the company.

Key Picks from the Sector

Dril-Quip currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can consider better-ranked players in the energy sector like Valero Energy Corporation (VLO - Analyst Report), Range Resources Corporation (RRC - Analyst Report) and Helmerich & Payne, Inc. (HP - Analyst Report). All the stocks sport a Zacks Rank #1 (Strong Buy).

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