Grant Prideco (GRP)

[frenchee]

GRP Street.com recommendation

We rate GRANT PRIDECO INC (GRP) a BUY. GRP has posted an impressive financial performance and offers
superior return to its shareholders. Going forward, the company is expected to continue its growth given the
favorable industry outlook.
HIGHLIGHTS
Favorable industry outlook. The increase in world-wide demand for energy products has given a new lease of
life to oil exploration activities. According to the U.S. Energy Information Administration the global demand for
oil is expected to grow from 84.60 million barrels per day in the year 2006 to 98 million barrels per day by the
year 2015. World crude oil demand is expected to rise by 1.5% for FY07 and FY08. Despite the higher oil &
energy prices the demand is expected to grow at a fast pace fueling growth in the production. GRP could
benefit from the buoyant oil and gas exploration markets through increased sales of its drilling and
ReedHycalog products.
Impressive financial performance. GRP revenue increased by 19.8% to $275.95 million in Q1 FY07 compared to
Q1 FY06, due to improved performance from Drilling products and services and ReedHycalog segment. Net
income increased by a higher rate of 42.3% to $131.55 million due to higher non-operating income and lower
taxes, partially offset by higher interest expenses. Earnings-per-shares (EPS) grew by a higher rate of 46.4%
to $1.01 due to lower share count. Going forward, management expects its earnings for full FY07 in the range
of $4.10 per share to $4.20 per share up from $3.50 per share reported in FY06.
Superior shareholder returns. GRP’s return-on-equity (ROE) increased to 34.47% as of the end of Q1 FY07 from
22.33% a year ago, following a robust growth in earnings over the past twelve months. This is significantly
higher than the Energy Equipment $ Services industry average ROE, and more than twice the S&P 500
average. During Q1 FY07, GRP repurchased 1.20 million shares for $45.00 million, which is expected to improve
its ROE further.
Risks to the BUY rating. There has been a rise in oil price in the past two years, which might lead to either
decline in demand or increased use of alternatives, which may ultimately result in the lowering of demand for
oil which in turn will slowdown drilling activity. This may negatively affect the earnings of the company.