Dril-Quip's recent Q4 2023 earnings call presented a picture of robust performance, exceeding expectations and signaling a potentially long and prosperous upcycle in the offshore and international oil and gas market. But beneath the surface of these impressive results lies a subtle shift in Dril-Quip's business model, one that seems to have flown under the radar of analysts – a shift that might just hold the key to unlocking explosive growth in the coming years.

The company's strategic reorganizations, footprint optimization, and the key acquisition of Great North have all contributed to a strong foundation for future growth. The excitement around the cross-selling potential of Dril-Quip and Great North products has been palpable, with customer inquiries exceeding expectations.

However, the most interesting development, and one that has yet to receive adequate attention, is the dramatic shift towards Master Service Agreements (MSAs) and a book-and-ship model. While the industry as a whole has been moving in this direction, Dril-Quip's transition has been particularly pronounced, with a staggering 80% of its business now driven by MSAs.

This shift has profound implications for how we evaluate Dril-Quip's future prospects. The company's reliance on bookings as a key performance indicator has diminished significantly. In the past, large orders, like subsea tree awards, would have contributed substantially to reported bookings. Now, under the MSA framework, these orders are only recognized in bookings upon call-off, creating a potential distortion in our understanding of the true order inflow.

To illustrate the magnitude of this shift, consider the following: in 2022 and 2023, subsea product bookings were flat at around $215-217 million. This figure solely reflects orders explicitly booked, not the potential value of open MSAs. For 2024, Dril-Quip guides for subsea product bookings of $200-225 million, seemingly suggesting a flat to slightly positive outlook.

But here's where the hidden potential emerges. The BP subsea wellhead MSA, extended for five years, alone represents an estimated $15-20 million in annual revenue *not* currently reflected in the bookings guidance. This is just one example among over 70 open MSAs held by Dril-Quip, representing a massive pool of potential revenue waiting to be unlocked.

The true value of these agreements is further amplified by the nature of Dril-Quip's business. With 80% of its revenue now based on a book-and-ship model, the company enjoys much shorter lead times. This translates to faster revenue recognition and improved cash flow, potentially supercharging Dril-Quip's growth trajectory.

"While rig availability and FPSO delivery timing presented short-term headwinds in Q3 2023, the underlying trend towards offshore project FIDs suggests a robust multi-year upcycle. Dril-Quip's disciplined operational improvements, coupled with this favorable macro backdrop and the strategic shift towards MSAs, point to a compelling investment thesis."

Subsea Product Bookings vs. Potential MSA Revenue

The following chart illustrates the potential discrepancy between reported Subsea Product Bookings and the potential revenue from open MSAs.

This under-the-radar shift towards MSAs could be the catalyst that propels Dril-Quip from a recovering player to a dominant force in the offshore oil and gas equipment market. The company's quiet transformation might just be the biggest story no one is talking about.

"Fun Fact: Dril-Quip's subsea equipment is designed to withstand the extreme conditions of the deep ocean, including pressures up to 15,000 pounds per square inch, temperatures below freezing, and corrosive seawater."