In my previous article (from October 12, 2015) about Helmerich & Payne (NYSE:HP), one of the leading land and offshore platform drilling contractors in the world, I recommended the stock. I argued that the best opportunity to achieve high capital gains is when shares of a good company are trading near multi-year lows. Also, I recommended the stock for the generous dividend, currently yielding 4.15%. Meanwhile, oil prices have started to recover, and the price of HP's stock has risen 11.1% since my article was written.
Since the beginning of the year, HP's stock is up 23.7% while the S&P 500 Index has increased 1.3%, and the Nasdaq Composite Index has lost 4.1%. However, since the beginning of 2012, HP's stock has gained only 13.5%. In this period, the S&P 500 Index has increased 64.7%, and the Nasdaq Composite Index has risen 84.3%.
HP Daily Chart
HP Weekly Chart
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Helmerich & Payne is a contract drilling company headquartered in Tulsa, Oklahoma, and engaged primarily in the drilling of oil and gas wells for exploration and production companies. According to the company, it stands as one of the primary land and offshore platform drilling contractors in the world and is an industry leader in innovation. H&P is a global enterprise with land operations across the United States, offshore operations in the Gulf of Mexico, and international operations in South America, the Middle East, and Africa.
Latest Quarter Results
On May 2, Helmerich & Payne reported its second-quarter fiscal 2016 financial results, which missed adjusted earnings-per-share expectations by a significant margin of $0.10 (55%). The company posted revenue of $438.2 million in the period, beating Street forecasts of $393.7 million. HP has shown earnings-per-share surprise in four of its last seven quarters, missing estimates in the three other quarters, as shown in the table below.
Source: Yahoo Finance
In the report, President and CEO John Lindsay commented:
These are demanding times in the energy service space, and the challenge for many is now one of survival. The U.S. land rig count is comparable to the all-time record lows reached in 1999. Sharp reductions in personnel, expenses, and investments are occurring worldwide, and we expect to see further deterioration in terms of drilling activity during the third fiscal quarter.
Drilling Operations Outlook for the Third Quarter of Fiscal 2016
Drilling U.S. Land segment accounted for about 80% of the company's revenue in the recent quarter. According to HP, in the segment, it expects revenue days to decrease by roughly 25% to 28% during the fiscal third quarter as compared to the second fiscal quarter of 2016. Excluding any impact from early termination revenue, the average rig revenue per day is expected to be roughly $25,000, and the corresponding average rig expense per day is expected to decrease to roughly $13,800. The company said that as of May 2, the U.S. land segment had approximately 84 contracted rigs that were generating revenue and 263 idle rigs.
Oil prices have shown a significant rebound in the last five months. As such, we can expect some recovery in oil and gas exploration and production activity, which could benefit Helmerich & Payne in the forward quarters. The last price of Brent crude oil $49.17 per barrel is already up 60% from its 12-year low on January 20, of $31.52, while WTI crude oil last price of $48.56 per barrel is up 49.2% from its January 20 low of $32.54.
According to OilPrice.com, market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year.
Baker Hughes (NYSE:BHI) reported for the first time two consecutive weeks of increases in the North America rig count. Tight oil operators added 12 rigs over the last two weeks, most of them being deployed in the prolific Permian Basin. Moreover, some North-American shale oil companies have shown a willingness to pick up drilling after prices surpassed the $50 mark. That makes me think that the worst for oil prices is over and that the deterioration in HP's U.S. Land segment rig revenue per day would cease shortly and more of its rigs will generate revenue.
Brent Crude Oil, August 2016 Leading Contract With 50 Day Moving Average
WTI Crude Oil, August 2016 Leading Contract With 50 Day Moving Average
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HP's fleet of high-specification rigs is well suited to the demands of unconventional resource development in North America, which has strong secular growth prospects. These rigs are favored by exploration and production customers drilling complex unconventional horizontal wells, which typically involve extended lateral well lengths and the drilling of multiple wells from one rig site. Unconventional horizontal wells currently account for more than 85% of U.S. rig activity, as shown in the company's chart below.
Source: RBC Capital Markets Energy Conference
Helmerich & Payne has a strong balance sheet. At the end of the second fiscal 2016 quarter, the company had cash and cash equivalents of $898 million, and its total debt was only $532 million. The debt to equity ratio was very low at 0.11. Net cash provided by operating activities during the first six months of 2016 was at $493 million.
Helmerich & Payne pays a generous dividend, currently yielding 4.15%, the highest yield among its peer group. Although the payout ratio is very high at 279%, the dividend coverage ratio (The ratio of income available to common stockholders excluding extraordinary items for the most recent trailing twelve months to gross dividends paid) is only 35.8%. The annual rate of dividend growth over the past three years was extremely high at 114.2%, over the past five years was also very high at 65.7%, and over the last ten years was at 32.5%. In the recent quarter report, CEO Lindsay reiterated that the company's strong and liquid balance sheet, robust backlog, and lower spending requirements should allow it to continue to return cash to shareholders. As such, and due to improving oil market, I believe that the high dividend payment is sustainable.
HP's price to book value is at 1.46, and its quick ratio is very high at 3.60. The price to cash flow is low at 10.05, and the price to free cash flow is at 29.9. Furthermore, its Enterprise Value/EBITDA ratio is very low at 8.18.
In addition, HP's Margins and Return on Capital parameters have been much better than its industry median and its sector median, however, not better of some S&P 500 median parameters, as shown in the tables below.
Although the U.S. land rig count is comparable to the all-time record lows reached in 1999, HP has been able to generate strong cash flow from operating activities. The company is well-positioned to weather the downturn and to leverage an eventual rebound in the North American land drilling space. Oil prices have shown a significant rebound in the last five months. As such, we can expect some recovery in oil and gas exploration and production activity, which could benefit HP in the forward quarters. Moreover, Baker Hughes reported for the first time two consecutive weeks of increases in the rig count. HP has a strong balance sheet, and while waiting for another significant rise in the price of oil, investors can enjoy the generous dividend yielding 4.15% a year.
Disclosure: I/we 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.