Background: The oil and gas contract driller Helmerich & Payne (NYSE:HP) has demonstrated sustained operational excellence in its highly cyclical industry, yet its stock has strong value characteristics, at least by today's standards. I thus consider it a core holding for growth and value investors at its current price around $65/share - though I liked it better when I started writing this piece in the morning of March 14 before it moved up 3% on the day on no news.
HP's predecessor company was founded in 1920 by William Helmerich; a Helmerich continues to be at the helm. The company has survived the Depression and numerous lesser energy busts.
While less well known than the "other" HP (Hewlett-Packard), Helmerich & Payne came first, and thus is in my mind the "real" HP.
The company: HP has developed and expanded a series of innovative "FlexRigs." These are innovative, proprietary drilling rigs that are especially adapted for unconventional oil and gas plays. While there are small offshore contract drilling and international operations, the company is essentially a US contract land driller. FlexRigs have such superior characteristics that the company has steadily been gaining market share over its land drilling competitors while generating higher profit margins. HP is a FlexRigs story, though one never knows what its research may develop to allow new growth fields.
The company designs and manufactures, or arranges for manufacture, of FlexRigs.
The land drilling industry has consolidated and the rig count has shrunk the past several years as the unconventional gas production from fracking has turned out to require fewer drilling rigs than anticipated. Thus, HP's FlexRigs are primarily used for liquids production, primarily oil but also some liquid gas, from unconventional and complex geological formations.
The stock: HP's shares have outperformed the general market over the past three months and on all time frames I can find beginning with and longer than 5 years. However, they have underperformed on a 2-year time frame, and that may offer opportunity for further relative performance.
Earnings estimates have been steadily rising, and trailing earnings are at record levels in this difficult market for land drillers.
What makes the stock especially attractive to patient investors is that even though it has been strong the past several months, it retains relative deep value characteristics.
The chart shows that HP has repeatedly surged, only to be restrained by cyclical downturns in the price of oil or the vagaries of the drilling cycle. This strikes me as a chart that "wants" to trend higher, though of course A) you never know and B) the longer-term uptrend lines one would draw from, perhaps, the 2004 low extending through the 2012 low allow lots of sideways or downward price action to occur while still respecting the longer-term uptrend.
This semi-log scale chart taken from MSN Money begins in the dismal decade of the 1980s, where so much of the competition went bankrupt. HP, however, recovered from the oil price collapse and associated collapse in the drilling rig count of the early '80s and then quickly began recovering. Meanwhile, numerous competitors that did not go bust never really recovered.
One does not get the full flavor of how successful this company has been from a chart that begins after the boom of the '70s had ended. If one goes back another decade, one would find that the stock probably began the 1970s around 40-50 cents/share. From the company's corporate history:
In the next ten-year period, from January 1, 1970, to December 31, 1979, the price of Helmerich & Payne stock rose 1,174 percent.
Thus it has participated in every bull market for oil prices that I can find.
The chart understates the stock's strength. In 2002, the company spun off its oil production division. This was no small matter. The press release announcing this revealed that the spinoff, called Cimarex (NYSE:XEC), was distributed to shareholders with a 0.53 XEC share per HP share ratio.
XEC has since quadrupled and pays a small dividend; HP retains some XEC stock. XEC has achieved a market cap that is now almost equal to that of HP.
Since 1989, before Saddam Hussein invaded Kuwait, HP has moved from about $6 to about $100 if one adjusts for the Cimarex spin-off. Counting dividends, that computes to about a 13% yearly rate of return, which is also my estimate of minimum total return since 1970. This beats the S&P 500 by a few points per year by my estimates. In contrast, Schlumberger (NYSE:SLB) is up "only" by a factor of 8 times in the same time frame, though it has paid somewhat higher dividends.
HP peaked during the oil price bubble in 2008 at $77 and has spent the last several years consolidating post-Lehman at a high level. The company's slides from its March 1 investor meeting demonstrate its superior profitability. Using the same link, one can get to the more detailed presentation from a February Credit Suisse conference. The company was moderately optimistic then:
The U.S. Land Market Today
There is a growing sense within the industry that the rig count has bottomed and that it will increase by one hundred rigs or so during 2013.
Customers remain deliberate with their capital spending and discriminating with the service providers they engage.
In a world where the growing expectation is to drill more wells with fewer rigs, an improving cycle will not treat all drilling contractors equally. There remains an opportunity for H&P to capture additional market share.
Clearly the company was farsighted in developing FlexRigs and is now reaping the rewards. As some of the slides from its presentations show, its stock price has far outperformed its peers on a multi-year time frame.
Consensus earnings estimates for the fiscal year ending September 30 are $5.36 and for FY 2014 are $5.68. Book value is anticipated to end this fiscal year around $40. Value Line data going back to 2000 suggests that an average price:book ratio is about 2:1. Price:revenue per share currently looks to be about average, also at about 2:1.
Thus the shares are no longer cheap, as they were last fall.
Because of these valuation metrics, my accounts maintain a core but not overweight position in HP. I have been buying modest dips and then selling modest rips with cash reserves. My expectation is that North America will sustain the company for quite some time; my hope is that sooner rather than later, China, which per the link has gigantic shale gas resources, and/or other countries will use HP's rigs.
Risks: Of course, there are numerous economic, general oil patch and competitive risks to the company and its shares. Sometimes the stock is quite volatile for little obvious reason. Also, the company has struggled to expand internationally, and failure to expand beyond North America could be problematic for its long-term success.
Summary: I have followed HP since 1980. It is one of a small number of companies that I have always liked and cannot recall hearing anything bad about it. I believe it embodies the best of corporate America and expect that management will continue to strive diligently to reward all members of the HP family. I therefore look at it as a core holding with a long-term perspective.
Additional disclosure: Not investment advice.