April 30, 2009 - Dresser-Rand Group (DRC-NYSE) engages in the design, manufacture, and marketing of rotating equipment and services to the oil, gas, petrochemical, and process industries worldwide. It offers various turbo products, such as compressors, gas turbines, power recovery turbines, and hot gas expanders used in various applications, including gas lift and injection, gas gathering, storage and transmission, synthetic fuels, ethylene, fertilizer, refineries, and chemical production; reciprocating compressors used in lower volume/higher compression ratio applications; and steam turbines, which include mechanical drive steam turbines and turbine generator sets that are used primarily to drive pumps, fans, blowers, and compressors for various industries, such as oil and gas, refining, petrochemical, chemical, pulp and paper, electrical power production and utilities, sugar, and palm oil.

Founded in 2004 but it was initially formed in 1986 when Dresser Industries and Ingersoll Rand merged. On October 29, 2004, Dresser Rand Holdings bought all the equity interest from Ingersoll Rand for about $1.1 billion. The company went public in 2005. The stock did well until October/November of last year, when it crashed, going from $42.50 to $11.70. Now it's on the mend.

As it should be. There's nothing wrong with the earnings at Dresser Rand. They've improved markedly since 2006 when they were 83 cents a share for the year. In 2007, they jumped to $1.25, then went to $2.36 in 2008. That strong growth won't be replicated this year. Analysts see $2.38 for 2009, followed by $2.10 in 2010. For 2010, there are 9 analysts that make up the consensus. The range among them goes from $1.10 to $2.69. That tells us that there is no real consensus, just an average. Each analyst is making a projection on the price of oil in the estimate. The higher the price, the more business Dresser will do, the better the earnings.

The company finished 2008 strong, with a fourth quarter of 92 cents a share, well above the 51 cents in 2007's last period, thanks mostly to a strong backlog of orders and advances in aftermarket services. They were positive enough to overwhelm the decline in oil drilling for the quarter since the price of oil fell markedly.

The company operates in two units: the After-Market division and New Unit. Each contributed 50% of sales in 2008. A large majority of revenues (93%) came from the oil and gas industry. Dresser has customers in 140 countries, served by 26 corporate centers. While drilling and refining are slower since the oil price drop, DRC has maintained decent sales because of its order backlog. But many customers are postponing delivery of new equipment or even cancelling orders as oil stays low. Unless oil rallies, expect sales in the New Unit group to slow.

The good news: There was a large contract signed at the end of March with Saudi Aramco, the state-owned oil company of Saudi Arabia. Dresser will provide the parts and aftermarket servicing for the kingdom's drilling and refining operations.

First quarter earnings are due on April 30. Consensus is for 28 cents vs 26 cents last year in the same quarter. However, in a very recent release, some analysts are expecting better than the consensus earnings. There were comments in the press on April 29: Dresser-Rand Group Inc. is expected to report first-quarter earnings that will beat consensus, driven by a strong backlog and continuing strength in its aftermarket parts and services segment.

Barclays Capital analyst James West said unlike a lot of oil service companies, Dresser was not really affected by the falling rig count as it was very much a backlog driven story.

"It has to do with the nice level of orders that were put into place in late 2007 or early 2008 that are now flowing out for revenue," said West.

Dresser-Rand's backlog at Dec 31, 2008 of $2.25 billion was 21 percent above the $1.86 billion backlog at Dec 31, 2007. New unit bookings rose 19.3 percent to $415.9 million.

The company had particular success in new unit orders over the past year and a half, said Stifel Nicolaus and Co. analyst Thaddeus Vayda, adding that aftermarket performance and delivery of prior orders would be the drivers behind first quarter results.

"When you look at how the company performs going into 2009 and 2010, the aftermarket business will carry the day, from a quarter to quarter perspective," he said. For the fourth quarter, revenue from Dresser-Rand's aftermarket parts and services segment rose 21 percent to $298.5million.

Analysts believe that Dresser-Rand's traditional exposure to international markets has held it in good stead in the faceof falling commodity prices and weakening energy markets.

"About 40 percent of their business is North America, 60 percent is international, which is certainly providing a good deal of stability," Vayda said.

More numbers: Market Cap is $2.09 billion. Price to Book is 2.86. Forward P/E is 12.13. Operating margin for the last 12 months was 15.13%; profit margin 9.01%. Total cash is $147.1 million; total cash per share is $1.80. Total debt is $370.3 million. Current ratio is 1.23. Book Value per share is $9.275. Beta is 1.27. 52-week range was $11.70 to $42.49. There are 81.96 million shares outstanding. Insiders own 5.7%. Institutions own 92.4%. There is no dividend.

DRC should be of interest to investors who believe the price of oil is only temporarily deflated. However, even at these lower levels, the company is doing well thanks to its After Market division and servicing contracts. While earnings will most likely be lower this year and again next year, the range of estimates suggests that analysts are unsure of where oil is going. If you think it's headed higher, you'll want to spend more time with DRC.

Company Web site: www.dresser-rand.com

- Ted Allrich