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The rapid growth in U.S oil production has surprised many investors all over the world. The liquid black gold has become a source of fascination. U.S. oil production has snatched away the attention from GCC region. According to the Department of Energy, U.S. oil imports will be less than the domestic oil production whereas this production is expected to be more than Saudi Arabia's oil production by 2020. Given that, every investor wants to benefit from U.S. oil and gas industry prospects.

To do that, one must identify the most promising bet out of the many players of the industry and invest some part of his portfolio in that stock. There are many opportunities; ranging from exploration to refining. I have identified one of the most promising stocks of oil and gas industry which is fundamentally strong and is currently available at a good price in the stock market: Helmerich & Payne (NYSE:HP).

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The industry dynamics are changing and well designs are becoming more complex. These changes have increased the demand for high performance rigs that can carry out daunting tasks. As the demand for high quality rig increases and shale gas gets more visibility, Helmerich & Payne growth prospect become better. Helmerich & Payne has the world's highest quality rig fleet that remains in very high demand. It is considered the "Best of Breed" and HP charges premium day rates for these rigs. As Hans Christian Helmerich, Chairman of the Board and Chief Executive Officer of HP, stated:

"Continuing to build the industry's youngest and most capable fleet not only positions us well going forward, but it also -- it allowed us to weather the turbulence we saw in the second half of last year. We are able to maintain our industry lead in terms of both activity and margins"

There are few facts that give HP an edge over its peers.

Long Term Contracts - Company's Edge

As of January 31, 2013, the company has 296 land rigs in U.S., 29 international land rigs and nine offshore platform rigs. In addition, HP is scheduled to complete another 5 new FlexRigs which will bring the company's total fleet of 330 land rigs and 299 FlexRigs. The five Flexrigs in the pipeline are already under long-term contracts with customers. It is expected that the company will build and operate three additional FlexRigs in U.S. with two exploration and production companies. The three rigs will also be built under multi-year term contracts and will boost revenue and profits of the company. These long term contracts provide sustainability to the earnings of the company and promise revenue growth for the future.

Premium Rates

The demands for the rigs have increased over time, especially for the high performance HP rigs. This demand induced shortage of rigs has allowed the company to charge premium prices to their customers, without curtailing the demand at all. Despite the premium charges, the HP rig utilization rate has not declined significantly. The rig utilization rate was reported at 85% in 4Q12 and 83% in 1Q13.

Financial Position

Looking at the numbers, one can easily say that the company has a strong fundamental backbone and its Financials look good. Earnings growth is slow but that seems to be an issue with the general industry. However, the price-to-earnings ratio is lower than the industry average and the PEG is favorably positioned. The overall risk of the industry is quite high, evident by high PEG, but HP's earnings growth visibility has lowered the uncertainty of the company's earnings.

I personally believe that the company should trade at a higher multiple than its peers due to the increasing numbers of long-term contracts for HP FlexRigs, which provides visibility of the future earnings.

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In January, the company reported its record 1Q13 earnings and beat the analysts' expectation. The market unleashed bulls on the stock and HP reached its maximum close of USD 67.94, on 19th February 2013. Now, the investors have taken their hands off the stock and the stock trades at a price of USD 59.01.

Here is an overview of the earnings announcement of the company:

GLOBE NEWSWIRE -- Helmerich & Payne, Inc. reported record income from continuing operations of $159,611,000 ($1.48 per diluted share) from operating revenues of $844,572,000 for the first quarter of fiscal 2013, compared to income from continuing operations of $144,297,000 ($1.32 per diluted share) from operating revenues of $732,588,000 during the first fiscal quarter of 2012, and income from continuing operations of $149,606,000 ($1.39 per diluted share) from operating revenues of $829,447,000 during the fourth fiscal quarter of 2012. Included in income from continuing operations for the first fiscal quarters of 2013 and 2012, and for the fourth fiscal quarter of 2012, is income (after-tax) related to the sale of used drilling assets and investment securities of $0.08, $0.03 and $0.03 per diluted share, respectively. Net income for the first quarter of fiscal 2013 was also reported at a record level of $159,603,000 ($1.48 per diluted share), compared to net income of $144,286,000 ($1.32 per diluted share) during the first fiscal quarter of 2012, and net income of $157,115,000 ($1.46 per diluted share) during the fourth fiscal quarter of 2012.

Segment operating income for U.S. land operations was $234,388,000 for the first fiscal quarter of 2013, compared with $224,706,000 for last year's first fiscal quarter and $236,619,000 for last year's fourth fiscal quarter. As compared to the prior year's fourth fiscal quarter, the number of revenue days for the segment sequentially decreased by 208 to 21,743. The average rig revenue per day decreased by $285 to $28,040 during the first fiscal quarter of 2013, but the decline was mostly attributable to lower revenue from early termination fees during the first fiscal quarter. Also as compared to the prior year's fourth fiscal quarter, average rig expense per day for the segment increased by $14 to $12,634 during the first fiscal quarter, resulting in a $299 average rig margin per day decline to $15,406. The rig revenue and margin per day averages included $37 per day of early termination fees during the first fiscal quarter of 2013 as compared to $283 per day during the previous quarter. Rig utilization for the Company's U.S. land segment was 82% for this year's first fiscal quarter, compared with 91% for last year's first fiscal quarter and 85% for last year's fourth fiscal quarter. At December 31, 2012, the Company's U.S. land segment had 239 contracted rigs (including 161 under term contracts) and 54 idle rigs.

Valuation & Conclusion:

To better assess the company, I am sharing some key financials that I forecast. I calculated two fair values of the company based upon the current P/E and the average P/E of the peers. I believe that the company should be trading at a higher P/E than its peers due to the quality, demand and sustainability of its operations. So, rather than coming up with a subjective multiple, I have used the average multiple of the peers to calculate the second fair value. The P/E multiples of Patterson - UTI Energy Inc. (NASDAQ:PTEN), Nabors Industries Ltd. (NYSE:NBR) and Pioneer Energy Services Corp. (NYSE:PES) are used to calculate the average P/E for the analysis.

Company's earnings and EPS are forecast till 2014 to calculate the fair price of the company in each year. Current P/E and Average P/E are used to calculate two different justified prices each year. Every calculated price is higher than the current market price and offers great capital return potential for the investors. For 2013, current P/E results in an upside price potential of 18% whereas the average P/E displays a humungous potential price return of 98%. I strongly believe that sooner or later HP's multiple will fall in line with the peers as the market realizes this fact. Even if the market takes its time to correct the company's multiple, HP is still a great buy.

I'll rest my case with the following statement from Forbes:

In the case of Helmerich & Payne, Inc., the RSI reading has hit 29.6 - by comparison, the universe of dividend stocks covered by Dividend Channel currently has an average RSI of 49.7. A falling stock price - all else being equal - creates a better opportunity for dividend investors to capture a higher yield. Indeed, HP's recent annualized dividend of 0.60/share (currently paid in quarterly installments) works out to an annual yield of 1.01% based upon the recent $59.89

Source: Helmerich & Payne - The 'Black Gold' Is Cheap