Dril-Quip 'Well Positioned' for Deepwater E&P Growth

Houston-based Dril-Quip is 'well-positioned' to benefit from the ongoing new deepwater rig delivery cycle and subsea activity growth anticipated in the next decade, Barclays analysts reported Thursday.

Dril-Quip on Wednesday signed a four-year contract valued at $650 million to supply Petrobras with subsea wellhead systems and associated tools for its deepwater drilling program offshore Brazil.

The "long-awaited" contract award follows the three-year, $180 million contract with Petrobras that expired in this year's second quarter and compares with the company's total backlog as of June 30 of $697 million.

The company is well-positioned given its recent capacity additions in Brazil and Singapore, said James C. West in an Aug. 23 analyst note.

"GOM [Gulf of Mexico] subsea wellhead orders are picking up and we expect demand for new wellheads to continue to ramp into 2013. We think there is upside to our estimates, particularly in 2013."

Dril-Quip subsidiary Dril-Quip do Brasil LTDA expects to begin making deliveries in the second half of 2013. No orders have yet been placed with the new contract, compared to the previous contract which was front-loaded with $80 million or 44 percent of owners placed right away, West noted.

However, West said he anticipates orders to be fairly even across the contract. With an average lead time of 9 to 12 months, wellheads should start exiting Dril-Quip's backlog for the second half of 2013 with deliveries over the next four-and-a-half to five years.

"We believe gross margins under this contract will be in-line with Dril-Quip's historical margins in Brazil," West commented.


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