Seeking Alpha
Long/short equity, growth, medium-term horizon, registered investment advisor
Profile| Send Message| ()  

Helmerich & Payne's (HP) management team embraced the shift to next generation rigs years ago, positioning the company perfectly for the industry shift to next generation, maintenance friendly and highly mobile alternate current ("AC") rigs.

One of the biggest challenges facing drillers as they moved into unconventional shale exploration and production was addressing the short comings of direct current powered rigs. Those rigs served prior generations solidly. But, with the need for longer lateral horizontal wells, DC's lower top drive motor speed meant higher well costs.

Helmerich's solution was shifting from its legacy rig fleet to an all new FlexRig.

The company retired its last mechanical rig last year and now offers customers a line of AC powered rigs with higher top drive motor speed, which has allowed customers to reduce costs by drilling more feet of pipe than they could with DC counterparts.

The industry responded by making those rigs - which operate with smaller crews - more highly utilized. While DC rigs are scrapped and stacked, Helmerich's AC drive FlexRigs sport a utilization rate north of 95%. The strong demand is good for future revenue given 4 new FlexRigs join their fleet each month.

According to the company, Helmerich's active land rig count is 25% higher than 2008, at 290 rigs in the U.S. and 29 more overseas. As their rigs have increased, competitors have seen their own counts fall 25%.

While competitors play catch-up, HP's fleet is already focused on the 1000-2000 horsepower sweet spot most employed in places like Marcellus and Eagle Ford. This fleet has helped footage per day climb 50% since 2007 while digging 40% deeper.

Drilling deeper more quickly means lower costs for independents such as Range Resources (RRC) and Noble (NBL). They not only benefit from lower rig costs, but from being able to rotate rigs to new sites more quickly. This type of flexibility helped Helmerich add 10 new FlexRig customers in FY12.

In FYQ4, 239 active rigs drove rig revenue higher. In the U.S. land rig segment, average rig revenue per day rose $229 from FYQ3 to $28,325. Strength should continue this quarter, thanks in part to 6 of the 20 stacked AC FlexRigs returning to service. In FY13, the company expects average rig revenue per day to increase by another $250.

The firm's offshore business, which includes 9 platform rigs, improved in the quarter too. Offshore operating income increased $4.3 million to $12 million from FYQ3 as revenue days were up 15% on 2 rigs returning to service. This helped offshore margin per day increase $6,249 to $23,330 from FYQ3.

And its international land segment saw revenue days climb 8% thanks to the addition of 4 contracted rigs. This drove operating income up by $1 million as average rig margin per day increased $506 to $8,210 per day with 26 rigs wo1rking.

High utilization, new rigs and pricing support earnings upside.

The retiring and modernizing of Helmerich's fleet has come at a high cost, pushing capital spending above $1 billion.

But, relief may be on the way. In FY13, Helmerich expects to spend about $740 million, with half slated for new builds. This spending is well below the $1.1 billion spent in FY12. Importantly, the spending will be financed by cash and operating income, which will help the balance sheet. Broadly, lower spending should help the company drop more to the bottom line next year.

Alongside spending cuts, the company is also keeping rig expenses in check. The average rig expense came in at $13,200 per day last quarter, which is in the middle of its FY12 range of $12,292-13,826. A concerted effort to contain costs should also help profits next year.

A good time to own shares.

According to data from the Seasonal Investor, the three month period ending February has been very good to shareholders. The stock has finished higher in 9 of the past 10 years, producing an average 14.60% return.

So, with more high demand capacity added monthly and lower costs, investors may want to consider adding Helmerich to portfolios. If these reasons aren't good enough, investors may also find it compelling to know the company boosted its dividend in December to $0.15 per share and analysts expect FY14 earnings per share of $5.26, up from $4.96 estimates just 30 days ago. Finally, it's also intriguing to consider the company owns 8 million shares of Atwood Oceanics (ATW) and another 967,500 shares of Schlumberger (SLB).

Source: Wildcatter Demand For AC Drives Boosts Helmerich & Payne