Dril-Quip, Inc.

13550 Hempstead Highway
Houston, Texas 77040
U.S.A.
Telephone: (713) 939-7711
Fax: (713) 939-8063
Web site: http://www.dril-quip.com

Public Company
Founded: 1981
Employees: 1,514
Sales: $340.8 million (2005)
Stock Exchanges: New York
Ticker Symbol: DRQ
NAIC: 333132 Oil and Gas Field Machinery and Equipment Manufacturing; 213112 Support Activities for Oil and Gas Operations

Dril-Quip, Inc. is not widely known outside the offshore oil drilling industry. As its name implies, Dril-Quip designs, manufactures, and installs equipment for oil and gas drilling, primarily for offshore rigs in deep, often treacherous waters. Founded in Texas by four partners, Dril-Quip has since evolved into a public company, known worldwide for its technologically advanced equipment and repair services.

IN THE BEGINNING

Dril-Quip, Inc. was founded in 1981 by four businessmen: Larry Reimert, Gary D. Smith, J. Mike Walker, and Gary W. Loveless. Reimert, Smith, and Walker had all worked for a company called Vetco Offshore, Inc., an oil drilling firm, and had years of experience in the oil, gas, and petrochemical field. They, along with Loveless, who worked for Great Western Resources Corporation at the time, decided to pool their knowledge and funds to form Dril-Quip. The new company was created to provide oil and gas industry professionals in the nearby Gulf of Mexico with state-of-the-art equipment and oilfield services. They set up shop on Hempstead Highway near Houston, Texas, with Reinert, Smith, and Walker as co-chairmen and majority owners (at 30 percent each), and Loveless as an outside consultant with a minority stake (10 percent).

The partners divided duties at the new company, with Reimert, who had a bachelor of science in mechanical engineering (BSME) degree from the University of Houston, heading up the finance, engineering, and product development departments; Smith took on sales, service, training of employees, and administration; and Walker, who had a BSME from Texas A&M, ran the factory, taking care of the new firm's manufacturing and supply needs. Loveless continued working outside the company and consulted on an as-needed basis.

In its early years Dril-Quip distinguished itself with technologically advanced products such as its specialty connectors, which formed an air- and watertight seal for use in oil and gas pipes and tubes. Over the next several years a variety of sturdy, easily installed connectors became one of Dril-Quip's claims to fame. In 1982 came the introduction of MS-15 Mudline Suspension System for oil wells, followed by ocean-floor stabilizing template systems in 1984 for deep-sea oil drilling. The company also realized the importance of top notch customer service to back up its increasingly sophisticated equipment and parts. Field personnel were trained in the proper installation, use, and repair of its products and were available for dispatch at a moment's notice to client facilities.

A major step in the company's future was opening a European headquarters in Aberdeen, Scotland, along the North Sea, in 1983. The new location included offices for sales and service, an engineering department, and a manufacturing plant to spearhead international expansion. Three years later Dril-Quip headed southeast from Great Britain, opening another sales and service office in Beverwijk, the Netherlands. The company debuted a new deepwater drilling product line the same year, called the Subsea Wellhead System. The Subsea system consisted of a huge, high capacity metal platform that handled up to 15,000 psi (pounds per square inch) of pressure during the deepwater drilling process. The Subsea product line proved pivotal to North Sea exploration and drilling, and provided a base for the numerous highly advanced Subsea components developed over the next decade. The company also sought another Houston-area manufacturing plant, outgrowing its 15-acre Hempstead Road facility.

EXPANSION AND GOING PUBLIC

The first part of the decade found Dril-Quip rapidly expanding, establishing a new location in Singapore in 1990 as its Asia and Pacific Rim headquarters. The Singapore facility, like its counterpart in Scotland, housed sales and service offices, engineering labs, and a manufacturing plant. Product innovations and outstanding service kept Dril-Quip at the forefront of the oil and gas industry. New product launches included additional wellhead systems and connectors, as well as deepwater and platform "trees" in 1992 and 1993, which revolutionized marine drilling operations. Dril-Quip's "trees" were submersible hydraulic pump systems for high maintenance drilling rigs. Dril-Quip opened another sales and service office in Europe, in Stavanger, Norway, in 1994.

By the middle to late 1990s Dril-Quip had more orders than it could handle. An extensive backlog was building and the firm needed not only further manpower (though employees numbered over 900 worldwide), but factory space and equipment to fulfill its obligations. Dril-Quip's three factories—the original on Hempstead Highway, a second Houston-area plant located on 218 acres off North Eldridge Road (construction began in 1991), and its European facility in Aberdeen, Scotland—were at capacity as the orders poured in. Business continued to boom in the United Kingdom, with two-thirds of the company's revenues and almost half of its workforce from this oil-rich region.

Dril-Quip's founding partners decided to go public to finance the company's expansion. An initial public offering would not only raise the necessary funds but foster further recognition for the firm. Dril-Quip reincorporated in Delaware in August, then went public in late October 1997. Initial trading took share prices to $40, though stock prices settled at about $37 per share by the end of the year. Revenues for 1997 reached $146.8 million, with net income of $12.9 million. The following year, 1998, revenues leapt to $177.6 million and net income reached $17.4 million. Stock prices fluctuated in 1998 and 1999, from as low as the teens to rise again to $30 by the close of the decade, with revenues for 1999 at $156.4 million.

THE NEW CENTURY

Dril-Quip established a new sales and service office in Macaé, Brazil, in 2000, bringing the company's sales offices outside the United States to six. As the company continued to expand, its stock price went from a low of $19 in December 2000 (with revenues of $163.9 million) to a high of $27.64 in May 2002, only to fall below $20 by December. Revenues for 2001 and 2002 reached $202.9 million and $215.8 million, respectively, while revenues for 2003 and 2004 increased slightly from $219.5 million and $221.6 million, respectively. Though revenues did not climb significantly, Dril-Quip contained costs and steadily increased its presence in the industry with the delivery of its high-tech subsea tree systems.

COMPANY PERSPECTIVES

Dril-Quip, Inc. is one of the world's leading manufacturers of precision-engineered offshore drilling and production equipment that is well suited for use in deepwater, harsh environments and severe service applications. The Company designs and manufactures subsea, surface and offshore rig equipment for use by oil and gas companies in offshore areas throughout the world. Dril-Quip also provides installation and reconditioning services as well as rental running tools for use with its products.

By 2004 rising gas and oil prices, which in turn led to capital spending by oil producers, spurred the introduction and testing of several new Dril-Quip products for market. Buzz concerning these new items—liner hangers, subsea control systems, and subsea manifolds-grew as they were successfully tested in the field. Stock prices, which had stagnated in the high teens and low 20s, began to rally in 2005 to over $56.30 late in the year. Dril-Quip took advantage of its solid stock prices to raise equity in December 2005, selling 1.5 million shares at $52 each for $74 million in net income.

Dril-Quip's equipment, spanning surface, subsea, and offshore, continued to lead the oil, gas, and petrochemical industry in innovation and solid production. New locations for sales offices were scouted as its worldwide manufacturing facilities tried to keep up with the demand. Its Houston-area plants remained Dril-Quip's biggest manufacturing facilities, fulfilling orders for what the company dubbed the Western Hemisphere (North, South, and Central America); its Scotland plant served clients in the Eastern Hemisphere (Europe and Africa); while its Singapore facility represented its growing Asia and Pacific Rim sector (Asia, Australia, the Middle East, and India).

The lion's share of Dril-Quip revenues continued to be its manufacturing division, though its service and repair sector continued to grow in the early and middle 2000s. The company's products, from large (huge drilling platforms and deep-sea templates) to small (specialty connectors including the Quik-Thread, Quik-Stab, Quik-Lok, and Quik-Jay lines), brought in 86 percent of revenues or $291.3 million for 2005; this figure was further broken down into its three divisions: 49 percent for the Western Hemisphere; 39 percent for the Eastern Hemisphere, and 12 percent for the Asia/Pacific region. Dril-Quip's total revenues for 2005 topped $340.8 million, with its services and repair division representing 14 percent of revenues.

In 2006 Dril-Quip celebrated its 25th anniversary and its fortunes continued to swell. The company had dramatically increased its worldwide presence in the last decade, with sales offices in the United States, Australia, Brazil, Denmark, England, France, Holland, Nigeria, and Norway, in addition to its warehousing and manufacturing facilities. Stock prices hovered in the $70s for the first half of the year, after hitting an all-time high of over $90 per share. New product innovations, including its fiber-optic satellite-controlled subsea tree system for large-scale offshore drilling operations, led to an increased backlog of orders and set the tone for what company executives and analysts believed would be a banner year. Dril-Quip's high-tech equipment, such as the very popular subsea trees (22 of which were delivered in 2005 alone), were designed for not only high production but to withstand harsh or severe oceanic conditions. The company's guarantee to provide round-the-clock service, repairs, and reconditioning for all of its equipment and components made Dril-Quip an international leader in the oil and gas industry.

PRINCIPAL SUBSIDIARIES

DQ Holdings PTY Ltd. (Australia); Dril-Quip Asia Pacific PTE Ltd. (Singapore); Dril-Quip do Brasil Ltda. (Brazil); Dril-Quip (Europe) Ltd.

PRINCIPAL COMPETITORS

Aker Kvaerner ASA; Cooper Cameron Corporation; FMC Technologies, Inc.; Oil States International, Inc.; Vetco International Ltd.

KEY DATES

1981:

Dril-Quip is founded in Texas by four partners.

1983:

The company forms a European division in Aberdeen, Scotland.

1986:

Dril-Quip opens a sales and service office in the Netherlands.

1990:

The company establishes a sales, service, and manufacturing facility in Singapore.

1991:

A second manufacturing facility near Houston begins construction.

1994:

A new office is established in Esbjerg, Denmark.

1997:

Dril-Quip reincorporates in Delaware and goes public.

2005:

Three new products are introduced to great success.

2006:

Dril-Quip celebrates its 25th anniversary.

FURTHER READING

Edmonds, Christopher, "Demand for Oil Rigs Shows No Letup," http://www.thestreet.com/_tscs/comment/chrisedmonds/10235721.html, August 21, 2005.

"Industrial Makes Opportunistic Foray," Corporate Finance Week, December 26, 2005, p. 4.

Perin, Monica, "Big Backlog Prompts Energy Manufacturer to Go Public," Houston Business Journal, August 22, 1997, p. 4A.

Snyder, Robert, "Slug Suppression Technology in the North Sea," World Oil, April 2004, p. 19.