Is Helmerich & Payne Preparing To Initiate A Share Repurchase?

| About: Helmerich & (HP)

Yours truly is wondering whether the designer, manufacturer and operator of contract drilling rigs, Helmerich & Payne (NYSE:HP) just might be cooking up an investor-friendly surprise. There's nothing definite here, and I wouldn't write the article except for the fact that I believe the stock is fundamentally more attractive than it was when I first wrote about it in Helmerich & Payne Continues To Gain Market Share on March 15. Despite operational success and an upside earnings surprise, the stock has fallen 3% even though the average stock has moved up strongly.

The news at hand is the unexpected monetization of a large part of one of the company's two remaining large holdings of other energy company's equity. On May 23, HP put out a press release titled Helmerich & Payne, Inc. Agrees to Sell Portion of Equity Portfolio Holdings:

Helmerich & Payne, Inc. (the "Company") announced today that it has agreed to sell four million shares of Atwood Oceanics, Inc. (NYSE:ATW). Following completion of the sales, the Company's equity portfolio holdings will include four million ATW shares and 967,500 Schlumberger Limited (NYSE:SLB) shares.

Company Chairman and CEO Hans Helmerich commented, "This satisfies our current objective for monetizing a portion of our equity investment in Atwood."

HP's interest in ATW goes back to 1970, when it traded an innovative but damaged offshore drilling rig in return for 28% of Atwood. Atwood has prospered mightily. HP has sold some of its prior holdings, so there's nothing completely striking that it is selling more; in this case, it's selling two million shares to Atwood at a below-market price and two million shares to an unnamed financial institution (per an Atwood press release). Over the years, HP had accumulated stocks in various energy companies and monetized them periodically.

The reason I'm wondering why HP is selling 4 million shares of a stock that closed Friday above $54 per share, presumably incurring a sizable tax liability, is that the company is very liquid as of now and is doing well operationally. HP has a market cap of $6.7 billion and net working capital of over $600 million. It is highly profitable, with earnings estimates for the current fiscal year having been raised a little bit recently.

However, HP has been under pressure from some in the analytic community. Witness this exchange from the Seeking Alpha earnings call transcript:

Bradley M. Lundy - Ivory Investment Management, L.P.

Had a quick question. On your last call, you spoke about an increased level of focus to return capital to shareholders. Can you, I guess, provide us with a little more detail as to when the board is expected to come to a decision regarding capital deployment positions?

Hans Christian Helmerich - Chairman of The Board and Chief Executive Officer

Well, Brad, I said earlier that the last date we took that up was in December, and we don't have a set time. We'll meet in June and then again in September. We don't have a set time of, hey, we're going to solve for this over this next meeting or the next 2 meetings. I think that the take away, though, is that we're very engaged in the topic, and I think the board is supportive. And so I think that we'll continue to put the time and effort to that issue. And so it's hard for me to tell you today what actual meeting date that will be taken up.

So the board meets next month. Hmmm.

Mr. Lundy was persistent:

Bradley M. Lundy - Ivory Investment Management, L.P.

Got you. And in the meetings, since the December dividend increase, I guess, trying to understand why the board hasn't taken action to reevaluate the dividend and capital structure. Has that not come up, or it's focused for later in the year?

Hans Christian Helmerich - Chairman of The Board and Chief Executive Officer

Oh no, as we've talked, it's come up, and so I don't think it's been a matter of, hey, let's take a pass on this. It's been a matter of -- we took, I think, a nice positive step in December. We have said since then that we recognize there's additional headroom and that we'll continue to move in that direction. So it's really, I think, a matter of timing and moving forward. It's not a matter of, well, we looked at this and decided not to.

Bradley M. Lundy - Ivory Investment Management, L.P.

Perfect. I mean, you guys have certainly done a tremendous job on the operating front over the course of the last several years. But despite that, the stock seems to have been relatively stagnant over the 1.5 years. I would certainly ascribe a material portion of that underperformance to the S&P, to the current capital structure and payout ratio. But we'd love to get your thoughts on what is the appropriate capital structure and payout ratio or what the proposals are to the board at this time.

Hans Christian Helmerich - Chairman of The Board and Chief Executive Officer

Well, no, I know you're keen on that, and I think, for us, it's -- we have said that, certainly, we've got a great balance sheet that could take additional debt on. And we also have the nice occurrence of being able to generate significant free cash flow going forward under our modeling, and we expect to do that, and that will be solved for by returning that to shareholders in terms of the portion we're not using to continue to grow the business. So it's a nice -- I know it's not what the speed you would like, but to us, it's a nice situation of being able to continue to grow the company. At the same time, you're able to positively look at returning additional capital back to your share owners.

This was a telling part of the conference call. The company's doing as well as market conditions allow, but HP has shown no oomph, at least relative to the average stock. Meanwhile the stock is around $63 and book value is around $40. A modest dividend increase occurred some months ago, to which Mr. Helmerich referred in one of his responses, but the company appears to be under pressure to have a special payout or, probably better from the Street's perspective, initiate a share repurchase program.

What better way is there to reward shareholders than to raise $200+ million (pre-tax) by selling ATW stock, which pays no dividend?

HP insiders like their stock. I discussed this in the March article. Since then, there has been some additional accumulation. On March 20, a director named Randy Foutch exercised 4122 options at $21.07/share and has not sold any shares. That followed the March 18 purchase of 2000 shares by another director, Donald Robillard Jr. at $62.24.

Individual investors do not pay HP much attention. Insiders are reported to own 3.3% of the shares; institutions own 93.3%. That doesn't leave much for individuals. HP is far off its high, both in time and price. It peaked in mid-2008 just above $77, and earned a then-record $4.23 that fiscal year (ends in September). Earnings then settled back the next three fiscal years, though profitability was strong, then reached a record $5.27 last year. Estimates are for close to $5.50 this year.

No matter what the board decides next month, HP has been a class act in a difficult and highly cyclical industry. Given its strong long-term record, I anticipate the company putting the cash from the sale of ATW stock to good use and continuing to play a leading role in the fracking revolution.

Thus I'm long HP and may purchase more shares this coming week, given this news and the fact that earnings are at a record but the share price remains 20% below an all-time high set five years ago.

Disclosure: I am long HP. 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.