Dresser-Rand Group's (NYSE:DRC) oil-and-gas infrastructure business is holding up better than its stock price. As the company's products are placed into projects with fairly long-term planning horizons, its customers may be reluctant to cut back despite the fall in commodity prices.
The stock price of Dresser-Rand is down 56% from the highs reached in summer 2008, possibly providing an opportunity for investors who are long-term bulls on energy.
Dresser-Rand sells several different critical products for the oil and gas industry, including steam turbines used to convert steam energy into mechanical energy for applications in pumps, fans, blowers, generators and compressors. The company also manufactures turbo machinery and compressors used to compress gas for re-injection for enhanced recovery purposes and to enable transportation through pipelines. The company concentrates on selling new units and then aftermarket parts and services. Its revenues are split equally between these two areas. Let's take a closer look at them now.
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Growth in this segment has gone from $345 million in 2004, to $1 billion in revenue in the 12 months ending September 30, 2008. Margins here hit 6.9% in 2007 or 9% adjusted for unusual items. While this may seem low, the more new units that are sold, the higher the installed base and the more aftermarket business the company can get. (Take a deeper look at a company's profitability with the help of profit-margin ratios in The Bottom Line On Margins.)
The company competes against some very large and deep-pocketed competitors but has so far held its own against them. General Electric (NYSE:GE), which just released its fourth quarter earnings, affirmed that its industrial division would grow by 0% to 5% in 2009. Its backlog stood at $172 billion a rise of 9%. In addition, GE saw a reduction in earnings from continued operations by 43% in the fourth quarter to $3.87 billion or $0.36 per share.
However, competitor Siemens AG (NYSE:SI) reported in its most recent fiscal quarter that profits in its oil and gas division were up 10% from the same quarter last year. Also, competitor Ebara Corporation (Nasdaq:EBCOY.PK) released its earnings in early January 2009, saying despite "growing uncertainties as the world economy decelerates, energy-related and infrastructure-related investments are expected to remain stable. Therefore, the outlook is for orders at about the same level as in the previous fiscal year."
The products Dresser sells tend to be expensive and part of long-term projects that are planned using lower commodity prices than a typical oil and gas drilling project. This might meant that a customer may be reluctant to cut back on these projects unless they are convinced a prolonged downturn in commodity prices is at hand.
Aftermarket Parts & Service
This business consists of parts and services sold into its installed base. This business used to be slow-growing with revenues increasing at a compound annual growth rate of only 0.4% from 1990 to 2000. Since 2000, however, Dresser-Rand has increased revenues at a much higher 10% compound annual growth rate. Margins here are also much higher than the new unit segment, reaching 25.1% in 2007.
The company is in good financial shape as total debt has been reduced from $823 million in 2004 to only $370 million as of September 30, 2008. Net debt to capitalization is 24%. Its backlog is at a record high of $2.3 billion. (For a complete guide to debt ratios, read out Debt Ratio Tutorial.)
The nature of Dresser-Rand's products make the business a little stickier than that of some of its peers in the oil service industry. If the downturn is a short one, taking a chance on this stock may reward investors in the long term.