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Dril-Quip’s Free Cash Flow and Backlog

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Dril-Quip’s operating cash flows and capex

In this article, we’ll analyze how Dril-Quip’s (DRQ) operating cash flows have trended over the past few quarters. We’ll also discuss how its free cash flows (or FCF) were affected given its capex (capital expenditures).

Dril-Quip’s cash from operating activities (or CFO) decreased 33% in fiscal 4Q15 over fiscal 4Q14. DRQ generated $31 million CFO in fiscal 4Q15. DRQ’s revenues declined in the past one year, leading to the lower CFO.

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Dril-Quip’s free cash flow

In 11 of the past 12 quarters until fiscal 4Q15, Dril-Quip generated positive FCF. DRQ’s capex, which has typically been low, remained nearly unchanged in fiscal 4Q15 over fiscal 4Q14. So lower CFO combined with similar capex led to FCF decreasing 40% in the past one year. In fiscal 4Q15, DRQ’s FCF was $21 million compared to $35 million a year ago.

In comparison, Oceaneering International (OII) saw a 49% decline in FCF in fiscal 4Q15 over fiscal 4Q14. Oceaneering International is Dril-Quip’s larger market-cap peer, generating $126 million FCF in fiscal 4Q15. Dril-Quip is 3.3% of the SPDR S&P Oil & Gas Equipment & Services ETF (XES).

Dril-Quip’s contract backlog risks

Given the weakness in upstream companies’ drilling capex, Drill-Quip’s contract backlog may face risks in fiscal 2016 and beyond. Dril-Quip’s product backlog by the end of fiscal 2015 was $685 million, or 43% lower than a year ago. Backlogs declined primarily due to purchase order cancellations and a stronger US dollar.

In fiscal 2016, DRQ expects to fill 60%–70% of its product backlog. Persistent oil and natural gas price declines in the current environment could lower new customer orders, causing a backlog reduction.

Approximately $47 million of DRQ’s backlog remained contracted with Petrobras (PBR). Petrobras is a Brazilian integrated energy company. Its operating performance has deteriorated significantly, while its long-term debt has mounted to more than $114 billion by the end of fiscal 3Q15. DRQ is uncertain about its remaining backlog with Petrobras.

In the next part of this series, we’ll look at Dril-Quip’s historical valuation.

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