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%

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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

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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

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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

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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

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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

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TrendOverview

Oil’sImpactonMarketCapitalization

DecreasingUtilizationandMarginControl

ImpactofStrategicExpansions

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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

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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

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TrendOverview

Oil’sImpactonMarketCapitalization

DecreasingUtilizationandMarginControl

ImpactofStrategicExpansions

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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

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TrendOverview

Oil’sImpactonMarketCapitalization

DecreasingUtilizationandMarginControl

ImpactofStrategicExpansions

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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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