Description

Grant Prideco is the world's leading producer of drill pipe, with almost a
70% market share. Drill pipe is used between the bottom of a drilling rig
and the drill bit. As such, it is halfway between a capital expense and a
consumable. Drill pipe will last for several years, depending on the
frequency and intensity of drilling activity, but must eventually be
replaced. Demand for drill pipe, therefore, correlates with the overall
level of drilling activity.

It is very important to understand that drill pipe is NOT the same thing
as OCTG or oil country tubular goods. While both may look similar to the
untrained eye, drill pipe is a highly specialized, highly value added
product whereas OCTG is a very low-end commodity product. Where OCTG is
sold by the ton, drill pipe is sold by the foot.

The key to appreciating GRP is to understand two things: first, that the
product is a very necessary, highly value added product; and second, that
GRP controls 70% of the market.

Prior to the 1996-97 cycle, this market dominance had less meaning as there
was a great deal of used drill pipe that could be recycled. This excess
of used drill pipe severely limited demand both the demand and the pricing
for new drill pipe. In the '96-97 cycle, drilling activity surged for the
first time in 15 years. Inventories of used drill pipe were depleted and
the market for new drill pipe became very tight. As the dominant producer,
GRP was able to raise prices significantly from the mid-teens to over $30
per foot. At the time, GRP was providing the bulk of profits for its parent
company, EVI Inc.

Long story made short: EVI used its significant profitability to purchase
Weatherford (in the process changing its name to Weatherford.) The new
Weatherford then spun off GRP to shareholders.

During the oil price collapse of '98, GRP's revenues collapsed as well,
showing the downside of its cyclicality. Importantly, however, during this
extraordinarily severe downcycle, the company never lost much money on an
operating basis. Unlike other segments of the drilling industry which
suffered severe pricing pressure, GRP's dominant franchise allowed it to
pretty much hold on to all of the pricing gains it had achieved.

The '99-00 cycle was marked by numerous execution errors by GRP. Without
going into excess detail, there were a number of medium sized execution
errors which cumulatively prevented GRP from reaching the profitability
it should have. Management has since been replaced, and new management
seems to be doing the right things.

Book Value = $4.00
Balance sheet = $250 m debt/$400 m equity
Revenues = $700 million or so for the current year

The stock has declined sharply because of fears that the slack economy
will reduce demand for oil and gas, thereby reducing demand for drilling
and, in turn, the company's products. All of this is true, but is more
than reflected in the stock price. Earnings power is well over $2 per
share in good times. This company has an important and dominant franchise
with a cost advantage and economy of scale that cannot be replicated and
will serve as an important deterrant to competition.

The stock has been as high as $26. I think it can easily see the $14
level over the next 4-6 months.

Catalyst

1.) Price. The stock has been hammered in recent days and is just too
low. It will not stay here for much longer.

2.) The long term outlook for natural gas is exceptionally strong. The
current demand weakness is due to the slack economy and the curtailment
of industrial demand by the high gas prices of last winter. Yes, believe
it or not, just six months ago natural gas was in short supply and people
were afraid there just wouldn't be enough of it around. The price shot up
from $2/mcf to $10/mcf and demand declined sharply because of fuel switching.
The natural gas situation is highly self correcting and we are well into
that process.