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:
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
18th July 2011
11th Feb 2013
*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:
US Land Segment
Number of revenue days
Average rig revenue per day
Average rig expense per day
Average rig margin per day
No of contracted rigs
Rigs under term contracts
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.