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Analyzing 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 trended over the past few quarters. We’ll also discuss how its free cash flows (or FCF) were affected given its capital expenditures.

Dril-Quip’s cash from operating activities (or CFO) fell ~40% in 1Q16 over 1Q15. DRQ generated $53 million in CFO in 1Q16. DRQ’s revenues fell in the past one year, leading to the lower CFO.

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Dril-Quip’s free cash flow

In 12 out of the past 13 quarters until 1Q16, Dril-Quip generated positive FCF. DRQ’s capex, which has typically been low, remained nearly unchanged in 1Q16 over 1Q15. So lower CFO combined with similar capex led to FCF decreasing ~45% in the past one year. In 1Q16, DRQ’s FCF was $45 million compared to $81 million a year ago.

In comparison, Oceaneering International’s (OII) FCF turned positive in 1Q16 compared to a negative FCF a year ago. Oceaneering International is Dril-Quip’s larger market cap peer, generating $32 million FCF in 1Q16. Dril-Quip makes up 3.6% of the SPDR S&P Oil & Gas Equipment & Services ETF (XES).

Dril-Quip’s contract backlog risks

Approximately $47 million of DRQ’s backlog remained contracted with Petrobras (PBR) at the end of 2015. Petrobras is a Brazilian integrated energy company. Its operating performance has deteriorated significantly while its debt has amounted to over $120 billion by the end of fiscal 2015. DRQ is uncertain about its remaining backlog with Petrobras.

Next, we’ll discuss Dril-Quip’s historical valuation.

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