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Dril-Quip, Petrobras in $650M Deal

Zacks Equity Research

U.S. equipment supplier Dril-Quip, Inc.’s (DRQ) wholly owned subsidiary — Dril-Quip do Brasil LTDA — has clinched a $650 million contract awarded by Brazil’s state owned energy company Petroleo Brasileiro S.A. or Petrobras (PBR).

The four-year contract requires Dril-Quip to supply subsea wellhead systems and associated tools. These systems will be used by Petrobras in the drilling of deepwater wells offshore Brazil.

Dril-Quip expects to start product delivery under the contract by the second half of 2013. Per the deal, the offshore drilling and production equipment maker will record these deliveries as purchase orders in its backlog. So far, no order has been logged with the new contract.

The customary terms and conditions for such agreements including termination, extension, product inspection, local content requirements and price adjustment provisions are also applicable to the pact between Dril-Quip and Petrobras.

This is a much awaited order for Dril-Quip, as it trails the three-year, $180 million contract with Petrobras that concluded in the second quarter of 2012. 

The planned investment of Petrobras in the country’s offshore market over the next five years will also likely prove beneficial for Dril-Quip, which is well positioned to take advantage of the project. Dril-Quip’s recent capacity additions in Brazil and Singapore along with the growth in demand for offshore equipments will further aid its progress.

Dril-Quip enjoys a strong market share, with many of its established products owning the first or second position in their respective categories. The company expects new orders from the growing markets of Brazil, GoM and Mexico that will further increase the revenues going forward.

Dril-Quip holds a Zacks #3 Rank, which translates into a Hold rating for a period of one to three months. Longer term, we maintain our Neutral recommendation.


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