Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following is management’s discussion and analysis of certain significant factors that have affected aspects of the Company’s financial position, results of operations, comprehensive income and cash flows during the periods included in the accompanying consolidated financial statements. This discussion should be read in conjunction with the Company’s consolidated financial statements and notes thereto presented elsewhere in this Report. Dril-Quip designs, manufactures, sells and services highly engineered offshore drilling and production equipment that is well suited for use in deepwater, harsh environments and severe service applications. The Company designs and manufactures subsea equipment, surface equipment and offshore rig equipment for use by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. The Company’s principal products consist of subsea and surface wellheads, subsea and surface production trees, subsea control systems and manifolds, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, liner hangers, wellhead connectors and diverters. Dril-Quip also provides technical advisory assistance services on an as-requested basis during installation of its products, as well as rework and reconditioning services for customer-owned Dril-Quip products. In addition, Dril-Quip customers may rent or purchase running tools from the Company for use in the installation and retrieval of the Company’s products. Both the market for offshore drilling and production equipment and services and the Company’s business are substantially dependent on the condition of the oil and gas industry and, in particular, the willingness of oil and gas companies to make capital expenditures on exploration, drilling and production operations offshore. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility. See “Item 1A. Risk Factors—A material or extended decline in expenditures by the oil and gas industry could significantly reduce our revenue and income.” According to the Energy Information Administration (“EIA”) of the U.S. Department of Energy, average Brent Crude oil and natural gas (Henry Hub) closing prices are listed below for periods covered by this report: In 2012, Brent Crude oil prices ranged between $88.69 per barrel and $128.14 per barrel with an average price of $111.57 per barrel price. Crude oil ended 2012 at $110.80 per barrel. In 2013, the Brent Crude oil price ranged between a low of $96.84 per barrel and a high of $118.90 per barrel with an average of $108.56 per barrel and ended the year at $109.95 per barrel. In 2014, Brent Crude oil prices ranged between a low of $55.27 per barrel and a high of $115.19 per barrel with an average price of $98.97 per barrel. Brent Crude oil ended the year at $55.27 per barrel. According to the January 2015 release of the Short-Term Energy Outlook published by the EIA, Brent Crude oil prices are projected to average $57.58 per barrel in 2015 and $75.00 in 2016. In its January 2015 report, the EIA expects Henry Hub natural gas prices to average $3.55 per Mcf in 2015 and $3.98 per Mcf in 2016. Henry Hub natural gas price was $3.24 per Mcf at the end of December 2014. Year ended December 31, Oil and Gas Prices Overview 29 2014 2013 2012 Closing Crude Oil ($/Bbl) .......................... $55.27 $109.95 $110.80 Average Crude Oil ($/Bbl) .......................... 98.97 108.56 111.57 Closing Natural Gas ($/per Mcf) ..................... 3.24 4.44 3.54 Average Natural Gas ($/per Mcf) ..................... 4.51 3.85 2.84