EOT Trade Alert – November 5, 2010

Corey Williams | November 5, 2010

November 5, 2010

Trade Alert:

Buy DRQ March 2011 $85 Calls at $2.90 or better

Company Background:

Dril-Quip (DRQ) is an offshore drilling and production equipment manufacturer. Their equipment is primarily used by major integrated oil and gas companies in deepwater, harsh environment, and severe service applications.

Short-Term Catalyst:

Prepare yourself for an explosion in oil and gas prices…

The expectation of stable or higher oil prices is key to the success of drilling equipment manufacturers. And right now oil prices seem destined to move higher.

Here’s why…

Oil prices are driven by two main catalysts… supply and demand and the value of the US Dollar.

It’s no secret the Fed’s quantitative easing is weakening the US Dollar. As long as they continue to print money, the dollar will continue to fall. If the $600 billion QE2 package doesn’t get economic growth back on track, it’s a safe bet Helicopter Ben will pump even more cash into the system.

More QE will crush the US Dollar… A weak dollar means oil prices will move higher.

But if QE2 works, then economic growth will certainly drive increasing demand for oil and gas. Increasing demand will certainly drive oil prices higher.

Either way, oil prices seem destined to move higher. And that’s great news for Dril-Quip.

As long as DRQ’s customers are confident oil prices are going to move higher, they’ll continue to buy more equipment from them.

But that’s not all…

The major integrated oil and gas companies are also facing tougher regulations of their deepwater oil wells. That means they’ll be retrofitting and retooling rigs already outfitted with DRQ equipment.

The result? DRQ should get a nice boost in sales and earnings on two fronts.

They’ll continue to make equipment for new deepwater wells. But they’ll also see a big influx of sales on deepwater wells already in production.

And based on the increasing backlog of equipment orders the company announced in their most recent quarterly report, demand for their equipment is accelerating.

Right now DRQ is breaking out to new all-time highs. I believe it could easily reach $90 per share based upon their growth rate and strong fundamentals.

Let’s grab these call options now to profit from higher oil prices and the increased regulation of deepwater offshore oil and gas wells.

Trade Details:

Underlying Stock Symbol:	DRQ
Current Bid-Ask Price:	$1.95 – $2.75
Option “Buy Up To” Price:	$2.90
Break-Even On Stock At Expiration:	$87.90
Maximum Risk Per Contract:	$290

Exit Strategy:

DRQ is trading at $72.77 per share. Resistance levels will be at $80 and again at $90. Remember, we want this stock to move higher. Support levels will be at $62 and $57. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

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