My Favorite Oil Services Stock

Summary

• Oil service & equipment providers are in a very good spot right now.
• Helmerich & Payne not only saw its market share rise by 5 points, it is also poised to go even higher.
• This company offers a great combination of a strong product portfolio, great balance sheet and a supportive fundamental environment.

Onshore oil & gas drilling service providers are in a very favorable environment of accelerating demand along with higher oil prices and high expectations. Helmerich & Payne (NYSE:HP) is one of the strongest players in its industry and a beautiful stock to be long.

Source: Helmerich & Payne

The Market Is Tightening

On March 31st I wrote an article which covered the most recent Dallas FED Energy Survey. This survey discusses the outlook from energy companies and offers a few interesting comments.

Article: 'What To Expect From Oil Companies According To The Dallas Fed Energy Survey'

Not only did the survey print another strong month at 40.7 points, it was also the 8th consecutive quarter above the 0% growth mark. Note that this index went positive shortly after the commodity bottom of the first quarter of 2016.

To avoid rewriting the entire article, let me show you my takeaway from the previous article:

American E&P companies are witnessing an environment of higher production at higher prices. However, this comes at a price. Both equipment and employment are getting increasingly expensive, and this is putting tremendous pressure on small companies with high operating costs. On the other hand, equipment providers are busy providing equipment at rapidly growing utilization rates. It's a good environment in which to be long both E&P and equipment companies, even though we could face headwinds from rising production in the long term.

It's clear that especially onshore equipment providers need to be in charge of cost control and the latest innovation to grow or even capture more market share. And Helmerich & Payne is doing exactly that.

Helmerich & Payne Is Feeling The Upswing

Just recently, Helmerich & Payne presented at the Scotia Howard Weil 46th annual energy conference. The company highlighted a few drilling market conditions that perfectly support the current environment of higher prices and a tightening equipment market. Note that most of these slides are updated over time and used in almost every investor presentation. It is important to check these things in order to avoid falling for smart advertising and cherry picking when it comes to fundamental data - which Helmerich & Payne is not doing at all.

Source: H&P Scotia Howard Weil 46th Annual Energy Conference 03/27

The company is supplying additional rigs due to higher demand while its super-spec rigs are currently replacing 'conventional' rigs as I will discuss in this article. Furthermore, we are seeing additional capital expenditures which I already expected given the overall market strength and support from the underlying economy.

A Top-Tier Global Rig Portfolio

Helmerich & Payne has expanded its rig fleet from 224 rigs during the financial crisis to currently 396. The growth streak ended when oil peaked in the third quarter of 2014. Since then, the company has only added 6 rigs. However, note that Helmerich & Payne did not reduce its fleet nor is it pressured to sell its fleet given its strong balance sheet with an equity to debt ratio of almost 2 and a current ratio of 3.3.

Source: H&P Scotia Howard Weil 46th Annual Energy Conference 03/27

Moreover, the company is massively pushing for the US super-spec rigs which are much more advanced that the conventional land rigs. These rigs are currently almost half of Helmerich's total rig fleet portfolio.

And it's not just a trend within Helmerich's own portfolio. The super-spec rigs have reached a 41% market share over the last year while total rigs were more or less unchanged.

Source: H&P Scotia Howard Weil 46th Annual Energy Conference 03/27

The company's total market share among AC drive rig providers is 30%. This is 10 full points above its biggest competitor Patterson UTI-Energy (PTEN).

Source: H&P Scotia Howard Weil 46th Annual Energy Conference 03/27

The total market share among all land rigs is roughly 20% as of March of this year. This is 5 points more than Patterson UTI-Energy's market share.

And last but not least with regards to the company's market share I wanted to share the graph below. It shows the total market share change since the oil peak of 2014. I think that the graph displays Helmerich's ability to exploit the market with advanced technologies and a rock solid financial position. The total market share has gone up by 5 points which is more than double the gain of its third biggest competitor (on a total market share basis).

Source: H&P Scotia Howard Weil 46th Annual Energy Conference 03/27

On a side note: Helmerich & Payne has been the number 1 rated company in terms of customer satisfaction for 10 straight years.

When it comes to the company's future position, it seems that they have by far the most AC drive land rigs with more than 1,500 hp. This would mean that this company could deliver in times of tightening demand as we are currently witnessing.

Source: H&P Scotia Howard Weil 46th Annual Energy Conference 03/27

Strong Revenue Growth & Margin Improvement

Total sales have increased to $2 billion on a TTM basis after bottoming in the first quarter of 2017. Revenues increased 11% in the FY2017 compared to 2016.

HP data by YCharts

The company's efficiency is doing even better. Profit margins are back at 20% after going negative in 2016 and the first quarters of 2017. Not only is the company benefiting from lower taxes, management also made clear that the rig transformation towards higher performance rigs would allow the company to charge higher prices going forward while capturing a bigger market share.

Again, the potential for margin expansion, coupled with our having approximately 100 rigs readily upgradable to super-spec status, gives the company excellent prospects for continued growth going forward.

- Q4/2017 Earnings Transcript

HP data by YCharts

One of the things I mentioned in this article is the company's strong financial situation. The financial leverage ratio is at 0.07 and has not been higher than 0.2 over the last 10 years. Moreover, the current ratio has not been below 2.00 since the Great Financial Recession. It's one of the strongest companies which does not have to liquidate assets to survive unlike some offshore drillers like Transocean (RIG) and many more...

HP Financial Debt to Equity (Quarterly) data by YCharts

Takeaway & One Last Graph

Helmerich & Payne is one of the best companies to benefit from rising oil and a tightening services & equipment market. The company has a technologically advanced rig portfolio which not only provided the company with a higher market share in the past, but is also able to capture a lot of the current demand.

It is extremely likely to see an even higher market share over the next few quarters with oil prices on the rise.

That being said, it seems that the stock price is preparing for its next leg higher. If the oil price (blue line) breaks above 67, we could see further momentum towards the $80 when it comes to HP's stock price. Additionally, you are rewarded with a 4.2% dividend yield and a rock solid balance sheet.

I have been long HP multiple times over the last two years as a trading vehicle and I am planning on buying this stock while it is below $70.

Stay tuned!

Author's note: Thank you for reading my article. Please let me know what you think of my thesis. Your input is highly appreciated.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HP over 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.

This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.