DEALTALK-Dril-Quip ripe for picking, may commmand hefty premium

Thu Jun 3, 2010 1:50pm EDT

Related Topics

* Dril-Quip stock may get more than 100 percent premium

* High margins, lean ops make co a preferred choice

* National Oilwell Varco Inc seen as likely bidder

By Vinay Sarawagi

BANGALORE, June 3 (Reuters) - Mid-size offshore drilling and production equipment maker Dril-Quip Inc (DRQ.N) is likely to be the favourite entry ticket for oilfield equipment providers like National Oilwell Varco (NOV.N) into the subsea equipment space.

With the highest operating margin in the industry, debt-free balance sheet and lean operations, Dril-Quip outshines peers like Oceaneering International Inc (OII.N), Carbo Ceramics Inc (CRR.N) and T-3 Energy Services Inc TTES.O as an acquisition target.

"You have a lot of offshore rigs coming up and they (Dril-Quip) can lead to a pretty big structural growth for subsea equipment," said Dahlman Rose & Co analyst Darren Gacicia.

A potential deal clincher for the company is its stellar operating margin of 27.3 percent, compared with Carbo Ceramics' 23.29 percent, Oceaneering International's 16.03 percent and T-3 Energy Services' 9.77 percent.

"Protocol integration, custom made process from start to finish and minimal use of subcontractors... (as well as) very lean operation helps Dril-Quip maintain high margins," Pritchard Capital Partners analyst Brian Uhlmer said by phone.

With these strong selling points, Dril-Quip has enough ammunition to command a sizeable premium.

"Talk has been around a $100 a share and that's a pretty big premium," Pritchard's Uhlmer said, adding $75 per share would be a "reasonable" offer.

A $100 per share offer, with 39.8 million shares outstanding, would translate into a deal worth as much as $4 billion, excluding debt, according to Thomson Reuters data. Shares of the company were trading at $43.28 Thursday afternoon on the New York Stock Exchange.

"If you look at what earnings could be and where the market could be at the peak of the cycle, these shares can definitely get closer to the high 80s," Gacicia said.

Dril-Quip's stock has risen more than 37 percent in the past one year, despite the Gulf of Mexico oil-spill, which dragged its shares by 15 percent.

The oil-spill is unlikely to affect the company's "compelling valuations" as it still remains "very attractive and well-run," Uhlmer said.

NATIONAL OILWELL ON THE HUNT

Of the potential suitors, National Oilwell Varco -- the largest U.S. oilfield equipment supplier -- seems most likely to be able to put down that sort of money on the table.

"National Oilwell Varco has the capacity, with both cash and debt, to make an acquisition of that size," said analyst Uhlmer.

"Dril-Quip would add manufacturing capacity in Brazil, which it (National Oilwell Varco) is going to need. And it will get them into a line of products which they are currently not into."

National Oilwell Varco is expected to win on 28 new deepwater rigs for Brazil's Petrobras (PETR4.SA)(PBR.N).

NOV has forked out $12 billion on acquisitions in the past five years, undeterred by a flurry of high-priced deals in the sector.

Chief Executive Pete Miller recently said the NOV could easily close between $500 million and $1 billion of deals in the next 12 months. [ID:nN27219553]

However, other big oilfield equipment suppliers like Cameron International Corp (CAM.N) and FMC Technologies Inc (FTI.N), cannot be ruled out from making a bid for Dril-Quip.

The only hassle could be whether the founders want to sell the company.

Houston, Texas-based Dril-Quip is run by two chief executives and co-founders in their late 60's -- Mike Walker and Larry Reimert. Together, they own about 15 percent of the company.

While Reimert manages engineering, product development, finance and sales, Walker is responsible for manufacturing, purchasing, facilities, service and administration.

"They (the CEOs) like to have their own freedom in running their own company. And with the clean balance sheet and viability, they can hold on until they want to sell," Uhlmer said. (Reporting by Vinay Sarawagi in Bangalore; Editing by Prem Udayabhanu) ((vinay.sarawagi@thomsonreuters.com; within U.S. +646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: vinay.sarawagi.reuters.com@reuters.net)

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