* 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 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
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
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
"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
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
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
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
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
(Reporting by Vinay Sarawagi in Bangalore; Editing by Prem
Udayabhanu) ((email@example.com; within U.S.
+646 223 8780; outside U.S. +91 80 4135 5800; Reuters