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TRANSCRIPT
Dril-QuipApril 19, 2016
SA: Jake StrzalkowskiJAs: Max Reich, Hannah Gordon, Nick Foy, Maciej Leleniewski, Jack Sawyer, Marco Ma,Zayda Romero
1
2
Dril-QuipSummary
HOLDOil’sImpactonMarket
Cap
Dril-Quip'sMarginControl
StrategicExpansionSummary
Trend Overview
Valuation Summary
Method Price Weight
Discounted Cash FlowPerpetuity Growth Method 50.11$ 50%Exit Multiple Method 56.36$ 15%
Comparable Company AnalysisP/E 63.73$ 0%EV/EBITDA 55.67$ 35%EV/Revenue 38.63$ 0%
Target Price 53.00$
Recommendation Summary
Company (DRQ) DRQCurrent Trading Price 59.65$
Recommendation HoldTarget Price 54.65$ Upside Potential -8.4%
3
Introduction§ TheOffshore EnergyMaterialManufacturingindustry iscomprisedofindustrialmanufacturersdelivering
materialsandservices toenergyproducers.Therearethreemaintypesofofproductsproducedbythesecompanies suchassuch assemi-submersibles, jack-ups, anddrillshipswhichprimarily operateintheGulfofMexico.Thisindustry exists toassistenergyproducerswithoffshore exploration bymanufacturingcustom rigstomatchproducer’s wantsandneeds.
McDermottInternationalNYSE:MDRMC:$1,070
OceaneeringNYSE:OIIMC:$3,570
GulfIslandFabrication
NASDAQ:GIFIMC:$120
ForumEnergyTechnologiesNYSE:FETMC:$1,240
Dril-QuipNYSE:DRQMC:$2,270
KeppelandOffshoreMarinePRIVATE
*MCasofMar’16- Factset
4
IndustrySnapshot§ Dril Quip owns2.0%ofthemarketforOffshore solutions.§ Amongthetopplayersinthisindustry are:
– CameronInternational(16%)– Saipem (13%)– FMCTechnologies (12%)
Ibisworld - Factset
CameronInternational
16%
SaipemS.p.A13%
FMCTechnologies12%
Subsea7S.A.11%
KBR8%
SMB7%
AkerSolutions Inc.7%
McDermottInternational Inc
6%
OceaneeringIntlInc.5%
Technip4%
ForumEnergyTechnologies
2%
Dril-Quip2% Other
8%
MARKETSHARE
§ Offshoremanufacturingishighlycorrelatedwiththepriceofoilwithan𝑹𝟐of.87inrespectstoindustry performance
§ Althoughtheindustry hasseenadecliningtrend,Dril-Quip hasnotdeclined inthesamemagnitudehastheindustry
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
FiveYear:Industry/Oil/Russel
IndustryAverage Brent Russel
5
SeniorLeadershipandCompanySnapshot
*Yahooand10K
§ CEO:BlakeDeBerry– Employeesince1988,
CEOsince2011– Heldvarious
managementandengineeringpositionsdomesticallyandinternationally
§ COO:JamesGariepy– COOsince2011– VPofDril-QuipEurope
from2007-2011
§ CFO:JerryBrooks– CFOsince1999– From1980-1999held
positionsasCFO,Secretary,andTreasureratChilesOffshoreCorporation
$-$150$300$450$600$750$900
$1,050$1,200
2011 2012 2013 2014 2015
Revenueinmillions
Year
RevenueGrowth
Dril Quip(DRQ)
2015 Revenue $844.3 million
CAGR 7.03%
Headquarters Houston, TX
OperationsWesternandEasternHemisphere. Asia-Pacific
6
Dril – Quip’sSuperiorSupplyChain
PurchaseRawMaterials
FinishingOperations(Huston)
FinishingOperations(Aberdeen)
FinishingOperations(Singapore)
FinishingOperations(Brazil)
Design/Forge /Fabricate
HeatTreat&RoughMachine
InHouseOperations InHouseOperations
§ Steelshapes, steelplate,steelpipe,weldinggases,fuel, oil,gasolineandpaint
§ Inhouse fabricationcontrolsforefficientinventory,quality, anddelivery tocustomers
§ Regionalfacilities'constructionmeetsconsumers specifications inatimelymanner
7
RevenueGenerationandMarginControl
*From201510K§ Mostrevenueisgeneratedthroughcontractsandreported
under“degreeofcompletion”§ Ifcontractsarecanceled,companiesarerequiredtocancelation
fee§ Dril-Quip’sbacklogatDecember31,2015was$685million,
comparedtoitsDecember31,2014backlogofapproximately$1.2billion
§ Inthedownturned economy,Dril-Quiphasmaintainedtheir5yearaveragemargins,farsuperiortotheircompetitors
CompaniesContacted
BacklogGenerated
RigsServiced
ContractsFulfilled
*Yahoo
$0 $100 $200 $300 $400 $500 $600 $700 $800
SubseaEquipment
SurfaceEquipment
OffshoreRigEquipment
Services
RevenueStreams
2011 2012 2013 2014
8
TrendOverview
Oil’sImpactonMarketCapitalization
DecreasingUtilizationandMarginControl
ImpactofStrategicExpansions
9
Oil’sImpactonMarketCapitalization
§ Sinceourindustry istiedsocloselytooil,it’stakenabighit
§ Dril-Quiphasalsotakenahit,butcouldgenerateabuyingopportunity inthefuture
§ Throughthefirstquarterof2016,oilandthe industryhasbouncedbacked
§ Dril – Quiphasgainedmomentumandshouldcontinuetodoso
§ Despitethepoor2015market,ithasnotsignificantlyhurttheirtopandbottom lines
*Yahoo
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
13-Apr-2012 09-Nov-2012 07-Jun-2013 03-Jan-2014 01-Aug-2014 27-Feb-2015 25-Sep-2015
Dril-Quip,Oil, IndustryFiveYearTrend
DRQ Brent IndustryAverage
-30%
-20%
-10%
0%
10%
20%
PerformanceSinceJan1st
DRQ Industry Brent
10
Oil’sImpactonTopandBottomLines
§ Dril – Quipisabletomanagetheiroperationsveryefficientlyingoodandpoormarketconditions
§ Revenuehasgrownata7%CAGRandnetincomehasgrownata15%CAGR
§ Thisispartdueto– Experiencedleadership– In-houseoperations– Closelymonitoringthemarket
becauseoftheirsmallsize§ Despitetheirslightdecreasein
2015,2016couldpaintadifferentstorysincesignificantbackloghasnotbegenerated
$-
$50
$100
$150
$200
$250
2011 2012 2013 2014 2015
NIinm
illions
Year
NetIncomeGrowth
$-$150$300$450$600$750$900
$1,050$1,200
2011 2012 2013 2014 2015
Revenueinmillions
Year
RevenueGrowth
*10Ks
11
TrendOverview
Oil’sImpactonMarketCapitalization
DecreasingUtilizationandMarginControl
ImpactofStrategicExpansions
12
DecreasingRigUtilization
0%10%20%30%40%50%60%70%80%90%
100%
UtilizationbyRegion
1YearAgo 6MonthsAgo MonthAgo Current
§ Rigutilizationsinsomeregionshassteadilydeclinedasofayearagomainlyduetodecreasingoilprices
§ Someregionshaveincreasedtheirtotalrigcountwhilealsodecreasingtotalutilization
§ Companieswhocannotaffordordonotwishtoexploreoffshoresolutionsarenotrenewingcontracts
§ Thiscouldbeseenasathreattothe industryorleadtocompetitionconsolidation
§ AnalystestimaterigutilizationtoincreaseinN.Americaoverthenexttwoyearsby22%
§ Whenoilpricesdrop,companiesmustbeawareofbreak-evenpointsinrelationtoonshoreandoffshoreproduction.Aslowas$20onshoreand$25offshore
*Rigzone
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MarginControl
§ Despitethedecreasedutilization,thishasnoteffectedDril-Quip’sMargins– GrossMarginabove40%and
grewmarginallyin2015– NetMarginabout20%andalso
grewgoinginto2015§ Havingallin-houseoperations
makesiteasyforthemtoaddprojectsormakecut-backs
§ Theyalsohavelimitedrigprojectsandhavefocusedonmoresubseaequipment
§ Servicesprovidedbythecompanyalsocreateasteadyrevenuestream
*Factset
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
GrossMargin
2014 2015
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
NetMargin
2014 2015
14
TrendOverview
Oil’sImpactonMarketCapitalization
DecreasingUtilizationandMarginControl
ImpactofStrategicExpansions
15
ImpactofStrategicExpansions
§ Announced:2015R&DFacilityinSingapore– $15million expansion announced tobecompletedby2017– TheHighPressureHighTreatmentfacilitywillwillenhanceproductdevelopment– Engineeringcapabilitiesmakethemaattractivesupplier toleadingoilandgasproviders
*From10Kss
$-
$50
$100
$150
2011 2012
NetIncom
e
Year
2012Expansion
$-
$50
$100
$150
$200
2012 2013
NetIncom
e
Year
2013Expansion
$-
$50
$100
$150
$200
$250
2013 2014
NetIncom
e
Year
2014Expansion
§ $24million increasewiththeirexpansioninBrazil.Alsoawarded$650MM,fouryearcontactwithPetrobras.
§ $51million increaseafterexpandingtheirAftermarketbusinessesforsubseasolutions
§ $39million increasewiththeirAberdeenexpansion.Attributedto$110MMsubseadevelopmentcontract.
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ValuationSummary
§ DespitethestrongoperationsofDril-Quip,wedecidedratethisasahold
§ Mainpointsfortherating– Lowbacklog– Unfavorablemarketconditions– Lengthoftimetorealizerevenue
§ KeyAssumptionsmadeinoutput– TerminalGrowthRate– 2%– CostofDebt- 0%– CostofEquity– 8.24%– SizePremium– 1.74%
HOLD
Valuation Summary
Method Price Weight
Discounted Cash FlowPerpetuity Growth Method 50.11$ 50%Exit Multiple Method 56.36$ 15%
Comparable Company AnalysisP/E 63.73$ 0%EV/EBITDA 55.67$ 35%EV/Revenue 38.63$ 0%
Target Price 53.00$
Recommendation Summary
Company (DRQ) DRQCurrent Trading Price 59.65$
Recommendation HoldTarget Price 54.65$ Upside Potential -8.4%
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ValuationSummary
High 3,574.4 3,133.2 3,070.3 640.4 231.0 13.7x 11.1x 2.3xMean 1,627.2 1,536.1 1,671.4 248.1 52.0 12.8x 6.7x 1.1xMedian 1,446.3 1,169.5 1,073.7 204.0 (18.0) 12.8x 6.4x 1.3xLow 78.0 113.5 306.1 (5.2) (119.4) 11.9x 4.5x 0.3x
Comparable Company Analysis
LTM data (04 -02-2016 )Company Ticker EV Market Cap Revenue EBITDA Net Income P/E EV/EBITDA EV/Revenue
Dril-Quip DRQ-US 1,969.1 2,315.1 844.3 274.31 192.0 11.9x 6.9x 2.3xMcDermott MDR-US 1,068.0 949.0 3,070.3 204.0 (18.0) 4.5x 0.3xGulf Island FrabricationGIFI-US 78.0 113.5 306.1 (5.2) (25.4) 4.5x 0.4xForum Energy TechnologiesFET-US 1,446.3 1,169.5 1,073.7 127.2 (119.4) 11.1x 1.3xOceaneering OII-US 3,574.4 3,133.2 3,062.8 640.4 231.0 13.7x 6.4x 1.3x
P/ELTM EPS 4.98$ Implied Price Target $63.73Upside (Downside) % 6.8%
EV/EBITDALTM EBITDA 274.31$ Implied Price Target $55.67Upside (Downside) % -6.7%
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ValuationSummary
§ WeightingSummary– DCF:50%duetovarianceinprojectingoutbacklog
andrealizingrevenue– EV/EBITDA:35%duetostrongoperationalefficiency
comparedtocompetitors– ExitMultiple:15%topullupDCF’s lowvaluation
$- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 $80.00 $90.00 $100.00
52-week range
Perpetuity Growth
Exit Multiple
Price/Earnings
EV/EBITDA
Recommendation Summary
Company (DRQ) DRQCurrent Trading Price 59.65$
Recommendation HoldTarget Price 54.65$ Upside Potential -8.4%
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Risks
• Large oilextractingcompanieswillnotinvestcapitalinoffshoreexplorationifsizeableprofitscannotberealized
• OurDril-Quipdependsonhigheroilpricestoturnaprofitoncapital intensiveprojects
Continueddownturnorcontinuedlowoilprices
• Dril – Quipreliesona smallnumberofcustomersandreliesonfewerthan10forlargercontracts
• Failuretomeetcustomersneedsandgeneratelargecontractswillceaserevenue
Failuretogeneratesignificantbacklog
• Dril – Quipmustcontinuetomakeexpansionstofindnewcustomers• Expansionsareverycapitalintensiveandglobaldemandfluctuateswithutilizationandoilprices
Continuingtomakestrategicexpansions
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Thankyou!
Questions?
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MarginvsCompetitors
Company GrossMargin OpMargin NetMargin
Dril-Quip 45.6 28.9 22.7
ForumEn. 24.5 5.7 (11.1)
Oceaneering 20.6 13.1 7.5
Aker 16.3 5.64 3.2
GulfIsland (4.9) (10.3) (8.3)
McDermott 9.8 2.8 (0.6)
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IncomeStatement1
Income Statement
Historical Forecasted2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 601.3 733.0 872.4 931.0 844.3 739.0 665.0 757.0 860.0 877.0 % growth 21.9% 19.0% 6.7% -9.3% -12.5% -10.0% 13.8% 13.6% 2.0%
COGS (excl. D&A) (338.8) (425.4) (484.6) (482.4) (428.8) (403.4) (363.2) (413.2) (469.3) (478.6) % of Revenue 56.35% 58.04% 55.55% 51.81% 50.79% 54.59% 54.61% 54.59% 54.57% 54.57%
Gross Profit 262.5 307.6 387.8 448.6 415.5 335.6 301.8 343.8 390.7 398.4 % Margin 43.7% 42.0% 44.5% 48.2% 49.2% 45.4% 45.4% 45.4% 45.4% 45.4%
SG&A (70.5) (82.2) (94.8) (92.8) (88.0) (80.1) (72.1) (82.1) (93.2) (95.1) % of Revenue 11.73% 11.22% 10.87% 9.96% 10.43% 10.84% 10.84% 10.84% 10.84% 10.84%
EBITDA 192.0 225.4 293.0 355.8 327.5 255.5 229.7 261.7 297.5 303.3 % Margin 31.9% 30.7% 33.6% 38.2% 38.8% 34.6% 34.5% 34.6% 34.6% 34.6%
Depreciation (23.0) (26.2) (29.3) (31.2) (30.5) (28.0) (23.8) (27.1) (30.8) (31.4) Amort. of Intangibles - - - - - - - - - -
Total D&A (23.0) (26.2) (29.3) (31.2) (30.5) (28.0) (23.8) (27.1) (30.8) (31.4) Other Operating Expenses (39.3) (37.5) (40.2) (45.9) (48.1) (42.2) (42.2) (42.2) (42.2) (42.2)
Total Operating Expenses (132.9) (145.9) (164.3) (169.8) (166.7) (150.3) (138.1) (151.3) (166.2) (168.6) Operating Income (EBIT) 129.6 161.7 223.5 278.7 248.8 185.3 163.8 192.4 224.5 229.8
% Margin 21.6% 22.1% 25.6% 29.9% 29.5% 25.1% 24.6% 25.4% 26.1% 26.2%
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IncomeStatement2
Interest Expense (0.1) (0.0) (0.0) (0.0) (0.0) - - - - - Interest Income 0.4 0.5 0.6 0.7 0.9 0.6 0.6 0.6 0.6 0.6
Net Interest Inc. (Exp) 0.4 0.4 0.6 0.6 0.9 0.6 0.6 0.6 0.6 0.6
Other Non-Operating Income - - - - - - - - - - EBT Excl. Unusual Items 130.0 162.1 224.1 279.4 249.8 186.0 164.4 193.0 225.1 230.4
% Margin 21.6% 22.1% 25.7% 30.0% 29.6% 25.2% 24.7% 25.5% 26.2% 26.3%
Unusual Items - - - - - - - - - - EBT Incl. Unusual Items 130.0 162.1 224.1 279.4 249.8 186.0 164.4 193.0 225.1 230.4
Income Tax Expense (34.7) (42.9) (54.3) (70.7) (57.8) (46.8) (41.4) (48.6) (56.7) (58.0) Earnings from Cont. Ops 95.3 119.2 169.8 208.7 192.0 139.2 123.0 144.5 168.5 172.4
Earnings from Discounted Ops. - - - - - - - - - - Extraord Item & Acct. Change - - - - - - - - - -
Net Income to Company 95.3 119.2 169.8 208.7 192.0 139.2 123.0 144.5 168.5 172.4
Minority Int. in Earnings - - - - - 0 0 0 0 0Net Income 95.3 119.2 169.8 208.7 192.0 139.2 123.0 144.5 168.5 172.4
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Sensitivity– FCF- CAPM
Capital Asset Pricing Model
Beta 0.87Risk-free Rate 2.41%Base Risk Premium 6.70%Market Cap 2,249.44$ Size Premium 1.74%
CAPM 9.98%
Key Statistics:
Current Trading Price 59.65$ Market Cap 2,298.37$ Net Debt (381.30)$ Beta 0.87 Shares Outstanding 38.53 Marginal Tax Rate 35.00%
Growth Rate Sens. Ref 2.00% Exit Mutliple Sens. Ref 6.93xForecasted
2016 2017 2018 2019 2020
EBIT 154.37$ 163.76$ 192.42$ 224.50$ 229.78$ - Taxes (38.85) (41.21) (48.42) (56.50) (57.83)
115.52 122.55 143.99 168.00 171.95 + D&A 24.17 23.78 27.07 30.76 31.37 - CAPEX 14.48 (19.66) (61.87) (69.71) (37.80) - Δ in NWC 52.28 (80.39) (16.40) (6.81) (13.64) Unlevered FCF 206.45$ 46.28$ 92.80$ 122.24$ 151.88$ Net Present Value $473.70
DCF - Perpetuity Growth SensitivityWACC
$53.51 0.08479 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0%3.0% 71.52$ 66.37$ 62.04$ 58.35$ 55.17$ 52.42$ 50.00$ 47.87$ 2.5% 67.18$ 62.76$ 59.00$ 55.77$ 52.96$ 50.50$ 48.33$ 46.40$ 2.0% 63.50$ 59.67$ 56.37$ 53.51$ 51.00$ 48.79$ 46.83$ 45.07$
1.50% 60.35$ 56.99$ 54.07$ 51.52$ 49.26$ 47.26$ 45.48$ 43.88$ 1.00% 57.63$ 54.65$ 52.05$ 49.75$ 47.71$ 45.89$ 44.26$ 42.79$ 0.50% 55.24$ 52.59$ 50.24$ 48.16$ 46.31$ 44.65$ 43.15$ 41.79$
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