Drilling Tools International Corp (DTI) stock intrinsic value fair value estimate & owner earnings analysis

Drilling Tools International rents specialized downhole tools (drill-bit assemblies, directional and wellbore-optimization tools, tubulars) to oil and gas drillers and also sells products such as target-depth technologies and repairs. About 81% of 2025 revenue of $159.6 million came from rentals; the rest is product sales, which include what customers must pay when a rented tool is lost in the hole or damaged beyond repair. Sales are mostly in the United States, with about $23.5 million of segment revenue from Europe, the Middle East and Asia-Pacific after recent acquisitions. Demand follows drilling activity, and 2025 oil prices averaged about 14% below 2024. How we measured earnings. We start from operating cash flow, remove swings in receivables, inventory and payables, charge stock-based pay as a real cost, and charge the tool purchases needed to keep the rental fleet whole. One judgement matters a great deal here: customers are contractually required to pay for tools lost downhole, and those payments ($14.2 million in 2025, $15.3 million in 2024, $19.7 million in 2023, $21.1 million in 2022) are reported outside operating cash flow. Because that cash replaces the tools the company buys, we treat it as an offset to tool purchases. Without that offset, the company would show roughly zero owner earnings in every recent year; with it, earnings per share were about $1.05 (2022), $0.13 (2023, a year of heavy fleet buying of $43.8 million), $0.30 (2024) and $0.32 (2025). Adding back the interest paid to lenders, which we do because debt is subtracted separately, gives about $1.07, $0.17, $0.38 and $0.44 per share. The wasting-asset question is limited: intangible amortization is only about $2.7 million a year, and tool depreciation is already covered by the tool purchases we charge. What we used as the normal level. We use $0.38 per share (about $13 million a year) of pre-lender cash flow, the median of 2023 to 2025. 2022 is set aside because it came before the 2024 Superior Drilling Products acquisition and the larger share count, and from an unusually low-capex, peak-activity year. Growth from acquisitions and new markets is not credited: the acquisitions have been lumpy, financed with debt and stock, and are not a steady repeatable process. Last year's actual growth in this cash flow was about 17%; we assume the next year falls instead, because in the first half of 2026 revenue was down 7.6% (first quarter down about 12%, second quarter about 3%) and underlying operating cash flow before working-capital changes was roughly half of the prior-year period, while borrowings rose from $46 million to $54 million. We found no filed reason to expect that to reverse quickly. Base case: about $2.73 per share. Cash flow of $0.30 per share in 2026, then $0.34 a year (a bit under normal, since the 2026 slowdown has no evidenced end) for 25 years, reflecting a business that has rented tools since the 1980s and whose fleet upkeep is already charged. Nothing after that is credited. Business worth about $4.31 per share, less debt and above-market financing costs of about $1.58, leaves $2.73. Bear case: about $(0.15) per share, roughly nothing. Activity keeps sliding, as the 2026 revenue trend suggests, and cash flow settles near $0.15 per share (about $5 million a year), only slightly above the roughly $4 million annual interest bill, for 15 years. The business is then worth about $1.43 per share against $1.58 of debt and financing costs, so the company appears to owe slightly more than it is worth, by about $0.15 per share. The bank credit facility (an $80 million revolver and a $25 million term loan with PNC, secured by substantially all assets and maturing March 2029, priced at about 6.5% and 8.3% at year-end 2025) would probably have to be refinanced on worse terms or with new shares in that situation. Bull case: about $4.44 per share. The company's own actual 2025 level ($0.44 per share) is regained after a weaker $0.40 in 2026 and held for 30 years, with no growth credited. Business worth about $6.02 per share, less $1.58 of debt and financing costs. What could make this wrong. The lost-tool payments are declining (from $21.1 million to $14.2 million over three years) and are tied to drilling volume; if they fall further, owner earnings fall by nearly as much. The valuation is highly sensitive to fleet-purchase spending, which was $11.9 million in the first half of 2026 alone. On the upside, if drilling activity recovers sooner than we assume, the bull case is closer to the truth. The company also does not disclose enough in the annual filing for us to reconcile the first-half 2026 lost-tool proceeds; we relied on the annual figures. The most recent quarterly filing text was not available to us, so first-half 2026 conclusions rest on reported financial data only.