Seeking Alpha
Oil & gas, long/short equity
Profile| Send Message|
( followers)  

In my earlier report in June 2012 I did a preliminary analysis of Helmerich & Payne (NYSE:HP) which was then trading at around $45. The stock almost touched $70 in mid February and is now hovering around the $60 mark. In the three quarters since the earlier report the fundamentals of the company have improved and the higher stock price is a testament to that.

In this report we are going to review our investment while analyzing the price behavior of the stock and reviewing the fundamentals.

The following graph shows the price behavior of the stock since 2000:

(click to enlarge)

Yahoo Finance

The stock price was near the $70 mark three times in the past. We are going to compare and contrast the price of the stock with the active rig count published by BHI and the earnings per share.

Date when stock price was close to $70

BHI - Oil Rig Count

BHI - Gas Rig Count

Total Rigs in Operation

Rig Utilization for HP - US Land Operations

EPS for HP

16th June 2008

389

1504

1893

96%

$1.18

18th July 2011

1021

889

1910

87%

$1.11

11th Feb 2013

1337

421

1758

82%*

$1.48*

*Figures for Oct-Dec 2012, the most recent quarter

Two major relationships can be established from the above table that will give us insight into operations of the company.

The operating performance of the company is unaffected by the variability in the number of rigs drilling for oil or gas as long as the total drilling activity is high. This is a huge advantage for the company in the current scenario where the number of rigs drilling for gas is near all time lows and the number of rigs drilling for oil is at all time highs. This establishes the fact that the company was able to move rigs that were drilling for gas and deploy them instead to drill for oil. This maneuverability lends a strategic advantage to the company. The earnings per share are also higher in this scenario because the company is able to charge premium pricing for its advanced Flex Rigs. The Flex rig is a new generation of drilling rig that the company started building and marketing in 1998. These are highly mobile and depth flexible rigs fitted with an AC drive. The company has constantly improved the design to make it more efficient and the latest design in this series is the 'FlexRig5'. As stated in the annual report, the FlexRig5 is "suited for long lateral drilling of multiple wells from a single location, which is well suited for unconventional shale reservoirs."

Revenues from the US Land drilling segment account for almost 90% of the firms total revenues. The following table shows the pricing details for the company's land drilling rigs:

 

Q1-2013

Q4-2012

US Land Segment

  

Number of revenue days

21,743

21,951

Average rig revenue per day

$28,040

$ 28,325

Average rig expense per day

$12,634

$ 12,620

Average rig margin per day

$15,406

$ 15,705

Rig utilization

82%

85%

No of contracted rigs

239

231

Rigs under term contracts

161

158

Idle rigs

54

51

The average rig revenue per day is likely to stabilize at the current level after a series of increases. In the most recent press release the company announced that it received new orders for three new drilling rigs to be built and delivered under term contracts. Though positive, this is indicative of softening demand for new rigs because the company would generally receive orders for more than ten rigs in a given quarter. Given all this, it is likely that the stock will consolidate below $70 for some time and is unlikely to break above it any time soon. However, it still remains a strong buy on dips and buying opportunities that may be lent by market sell offs.

Source: Helmerich & Payne: Going Strong, But Poised For A Breather