Oil-Rig Equipment Maker Goes Global As Energy Prices Keep Rising

Kevin Harlin Fri May 9, 5:53 PM ET

High oil and natural-gas prices are making for blowout earnings for energy companies. T3 Energy Services is growing quickly by preventing blowouts.

The company manufactures and services the valves and other equipment used for drilling and piping oil and gas. Its latest foray is in subsea blowout preventers -- car-size valves stacked on a well that can instantly seal off the well if excess pressure is detected. BOPs, as they're called, can save lives and machinery.

Recent acquisitions give T3 (NasdaqGS:TTES - News) more proprietary technology and reach in the higher-margin BOP business for those deep-sea wells. In addition to getting wet, the company also is going overseas, signing business in places such as Russia and the Middle East.

Originally, the Houston-based company serviced and rebuilt other manufacturers' equipment.

But Michael Anderson, T3's vice president of investor relations and business development, said customers asked it a few years ago if it could provide new equipment itself.

Subsea BOPs, surface wellheads and pipeline valves were all in high demand. But existing manufacturers had long delivery times. For exploration companies paying hundreds of thousands of dollars a day to rent drilling rigs, the delays were costly.

"This is something that T3 has been able to capitalize on, by providing attractive delivery with value-based pricing," Anderson said.

The shift has paid off.

T3 posted revenue of 67 million in 2004. By last year, sales reached $217 million. Earnings per share grew from 27 cents in '04 to $2.35 in 2007. Analysts surveyed by Thomson Reuters expect EPS of $3.16 in 2008.

T3 said its original equipment represented 76% of total revenue for 2007, compared with 65% the year before.

The company, first known as Industrial Holdings, incorporated in 1989. In 2001 it merged with crosstown rival T3 Energy Services. The new company took the T3 name.

In 2003, the company hired its current chief executive, Gus Halas, and began to rethink its business. That's when it began to beef up its own engineering and manufacturing capabilities.

At first, T3 came out with copycat products, analysts say. Last year, it spent about $96 million to buy Energy Equipment and HP&T Products -- related companies that manufactured and sold deep-sea BOPs and other equipment. That gave T3 access to new technologies and markets. It shipped its first subsea BOPs in late September.

"The best part of this company really is the management," said Brian Uhlmer, analyst with Pritchard Capital. "They're a very well-managed company. They're not big risk takers, but they do enough to grow significantly every year."

T3 now has 21 manufacturing facilities in North America. The company says it plans to buy HP&T's manufacturing operation in India, which would give it a lower-cost source.

"People are recognizing who they are and not seeing them as a cheap knockoff," Uhlmer said.

Oil and natural-gas prices have been high, which keeps T3's customers busy looking for new deposits. Oil, for instance, is in record territory, at around $125 a barrel.

Anderson said the demand for T3's services are there even if energy prices come down.

"Even if you take that away and remove some of that marginal activity, you still have a very strong industry, even at $90 a barrel," Anderson said.

There are some potential head winds.

RBC Capital Markets analyst Victor Marchon thinks orders for more types of offshore rigs already have peaked. With declining orders, the three major competitors in the subsea BOP market -- Cameron International (NYSE:CAM - News), Hydril and National Oilwell Varco (NYSE:NOV - News) -- are not likely to easily cede ground.

But despite the competition and tough market, Marchon thinks T3 could find buyers.

"When you look at what's happening in the deep-water drilling market, there's still a lot of opportunity for it," he said.

T3 also is signing more business overseas. Last month, it announced an $8 million multiple rig order in Russia. It expects that contract order to grow.

T3's Anderson said the deal will also serve as a beachhead into the Russian market.

Those international orders tend to be larger -- with companies ordering entire drilling rig systems, rather than the a la carte component ordering more common in the U.S. That makes revenue more lumpy, the company says.

But as international opportunities grow, companies are insulated from turmoil in any one region, analysts say.

When T3 reports first-quarter results next month, analysts expect 70 cents a share, on revenue of $69.6 million. That would be a 37% improvement from a year ago in EPS, and a 45% gain in revenue.