Helmerich & Payne: Great Bet If We Hit Massive Levels of Inflation

Research Rec.: Helmerich and Payne (HP) at $22.55

Tuesday I bought the oil driller Helmerich and Payne at the price of $22.58. If you remember, I recommended this stock on September 29, 2006 at the price of $23.03. After the recommendation, I issued a sell recommendation of the stock on August 12, 2008 when the stock was selling around $53.95. I missed calling a sell recommendation at or near the top when the stock was selling for $77.24 in June of 2008.

Keep in mind that my current purchase is strictly speculation due to the fact that we're still in a severe bear market. This means that when, and if, the market and economy continue to go lower, the demand for oil and its price will go down further. However, according to Dow's theory the following upside targets for HP's stock price are:

• $37.08
• $47.12 (50% principal)
• $57.15
• $77.24

We can expect that a bear market rally would bring the stock price at least to the $37.08 level. However, we should never forget the downside risks this stock is likely to face. My expectations of the downside are based on the earnings falling by 50% which would not impact the dividend at all. Yet, a decline of earnings should bring a decline in the price of the stock. It is safest for us to assume that the price would fall at least half of the most recent low of $17.01. If you're willing to accept a decline of 62% then this is a great speculation (as opposed to investment) in a quality dividend paying stock. According to MergentOnline, HP has increased the dividend for 31 years in a row.

Some would argue that I should highlight the relevance of peak oil, future inflation due to the government stimulus, increased aggregate demand, and other assorted factors that affect oil. While these matters are important the reality is that the markets rule the day. What I do know about inflation is based on the chart below. I pulled from BigCharts.com the price movement of Helmerich and Payne, Coure D'Alene (CDE), Agnico-Eagle (AEM) and the Dow Jones Industrial Average from the period of 1973 to 1983.

click to enlarge

Notice how HP was able to beat out the traditional favorites during inflation like Agnico-Eagle, a gold mining company. Also notice how HP hammered the best precious metal bet on inflation, silver, as represented by CDE. As expected, the Dow Jones Industrial Average was a non factor as an investment but was used as a point of reference. If we're headed towards massive levels of inflation, after the wipe out of assets in the current deflation, then HP might be the best of the best when that time comes.

Comments

[tankmanbob:]

You should not rule out the possibility all the oilfield services companies will have negative earnings for the next couple of years. There is much talk about multiples of earnings giving a PE that can be used to value the S&P, and stocks - but not much emphasis on what happens if the earnings go away entirely.

H&P is a great company with excellent people and assets. They will do well in an eventual recovery. Their last quarter had good earnings, but one of the problems is they were boosted by clients buying out their contracts - so a short term blip will turn into idle rigs in the next several quarters

Mar 11 08:10 AM

[Dividend Inc:]

Greetings Tankmanbob,

You make some great points that as an investor should not be ignored. I completely agree with you. As this is a speculation on a "quality" stock I am only hoping that we're in the rally phase of this bear market. So far things are working in my favor from a Dow Theory standpoint but you're on the market with your assessment of the situation.

Thanks for your thoughts and I gave your comment a thumbs up.

Mar 11 05:39 PM

[bill1fl:]

The drilling business is one of the toughest to figure out. As an old contractor in south Texas once told me, it is either chicken or feathers. I have been in the business and that is as true today as it ever was. HP is a great company and will continue to take market share of whatever market there is. With gas going down toward $ 3 the pie is getting smaller and smaller.

Apr 06 05:16 AM