Seeking Alpha
Research analyst, long/short equity
Profile| Send Message| ()  

Helmerich & Payne, Inc. (HP) seems to be doing pretty good going along with the demands and requirements of the oil and energy market, as evident from the Q3 FY2012 results of the company.

It recorded income from continuing operations of $150 million from operating revenues of $820 million for its third fiscal quarter ended June 30, 2012, compared to income from continuing operations of $110 million from operating revenues of $644 million during last year's third fiscal quarter ended June 30, 2011.

I would say that H&P wins hands down with its immediate competitor, Nabors Industries (NBR). The operating income margin of H&P stands at 27.62%, compared to 7.95% of NBR. The P/E ratio of H&P stands at 9.54x compared to 21.18x of NBR. Even EPS of H&P is much plumper at $4.99, compared to $0.75 of NBR.

Still the stock price of the company fell by 24.44% in the last six months. Is it because of the lack of investor confidence or due to a factual slowdown in the economy? As it seems, the fall in stock price is on with every other company in the oil drilling and extraction industry.


(Click to enlarge)

  • Atwood Oceanics, Inc. (ATW): -2.81%
  • Pioneer Energy Services (PES): -3.7%
  • Precision Drilling (PDS): -30.51%
  • Union Drilling, Inc. (UDRL): -39.75%
  • Patterson-UTI Energy, Inc. (PTEN): -21.67%
  • Unit Corp. (UNT): -13.69%

Following the day-to-day price change can be misleading at times. If you ask me, it's always better to dig into the fundamentals before anything.

A brief glimpse of the segment operating incomes

Segment operating income for U.S. land operations was reported at $235 million for the third fiscal quarter of 2012, against $177 million for last year's third fiscal quarter and $210 million for this year's second fiscal quarter. The sequential increase in segment operating income was due to a continued increase in activity and revenue combined with a decline in per rig expenses.

The company seems to have the majority of the rigs reserved for the U.S. land segment. At June 30, 2012, the company's U.S. land segment had 246 contracted rigs (including 164 under term contracts) and 30 idle rigs. As of July 27, 2012, the company's existing fleet had 279 land rigs in the U.S., 29 international land rigs and nine offshore platform rigs. In addition, the company is already programmed to complete another 25 new H&P-designed and operated FlexRigs under long-term contracts with customers. Upon completion of these commitments, the company's global fleet is expected to have a total of 333 land rigs, including 296 FlexRigs.

If H&P is deliberately zooming in on the land segment when companies like Transocean (RIG) and Noble Corp. (NE) are hugely investing in the offshore segment, it definitely seems to be a good business strategy to me.

Segment operating income for the offshore operations was $7 million for the third fiscal quarter of 2012, against $13 million for last year's third fiscal quarter and $9.8 million for this year's second fiscal quarter. Lower rig margin per day and lower activity led to the decline in income.

The company's international segment enjoyed the fruits of increased demand and better rig margin per day as well, which manifested in the international land segment operating income reported at $6.3 million for this year's third fiscal quarter, against a loss of $624,000 for last year's third fiscal quarter and a loss of $974,000 for this year's second fiscal quarter.

From the horse's mouth

Chairman and CEO Hans Helmerich commented:

"We are pleased to report yet another all-time record level of quarterly income from continuing operations. Including the previous record level reported for the first fiscal quarter, this marks the second time that we announce record breaking results this year. Nonetheless, the pronounced decline in oil prices has impacted drilling market conditions and prospects. Our customers appear to be adjusting their budgets accordingly, and demand for drilling rigs and services seems to be softening. In the current rig count environment, operators may even become more focused in their efforts to enhance drilling efficiencies and reduce total well costs. We would expect the industry movement toward more complex well designs, faster cycle time, greater focus on safety and the use of innovative technology to continue to support H&P as a preferred drilling services provider. Our strengths are well aligned with these trends, which should allow us to continue to successfully provide greater value to our customers through the cycles."

New technology, new problem

Coming to the point of better-designed, well-structured and highly efficient rigs, the company seems to be placing huge focus on the advantage of technology in the oil drilling and extraction industry. As Dr. Kent Moors describes in this article that the EROEI problem depends a lot on the level of technology employed in the process, and ultimately, it will be one of the most important metric in judging the market competence of any company in the oil and energy sector.

The company knows what to do in this scenario and thus the introduction of the FlexRig5 design, the fifth FlexRig generation.

This is an excerpt from the press release:

The FlexRig5 is ideally suited for long lateral drilling of multiple wells from a single location, which is increasingly in demand for plays such as unconventional shale reservoirs. The new design preserves the key performance features of H&P's flagship FlexRig3 combined with a bi-directional pad drilling system and equipment capacities suitable for wells in excess of 24,000 feet of measured depth. The FlexRig5 will help the Company expand into new markets as it provides its customers with a broader offering.

The introduction of the latest FlexRig5 devices might already be showing their impact in the increased rig margin per day. To conclude, H&P is gradually gearing up to capture a target market with the latest technology, and this might have already directed the financial numbers to go up.

I can't write H&P off at the moment. Better to wait and watch!

Source: What You Need To Know About Helmerich & Payne