Technology Sets Driller Apart

12/31/2012


  Recent Price
$56
  Dividend
$0.60
  Yield
1.1%
  P/E Ratio
11
  Shares (millions)
107
  Long-Term Debt as % of Capital
5%
  52-Week Price Range
$68.60 - $38.71

The phrase "technological advantage" might inspire thoughts of cutting-edge software or cloud computing. But innovation has value in all fields. Just ask Helmerich & Payne ($56; HP).

Fracking — hydraulic fracturing of rock to allow the extraction of oil or natural gas — has been around since the 1940s. And after decades of research and practice, H&P does it better than anyone else. Its rigs drill twice as fast as the industry average. That speed allows H&P to charge a day rate 60% above the average.

With profit margins and estimates trending higher, H&P warrants a premium price. But investors need not pay up for this industry leader. At less than 12 times estimated year-ahead earnings, the shares trade roughly in line with their peer-group median. And H&P's trailing price/earnings, price/sales, and price/operating cash flow ratios are at least 22% below their three-year averages. Helmerich & Payne is a Buy and a Long-Term Buy.

Best in class

With 264 rigs operating at the end of September (237 in North America), H&P is far from the largest contract driller. But while the company accounts for just 12% of North American rigs, it operates about 40% of the continent's rigs that use alternating current (AC). These AC rigs offer more precision and flexibility, a technological advantage that keeps them in demand.

H&P says its newest rigs can drill a well in just 15 days, about half of the average for an industry using mostly older equipment. That kind of technological advantage matters only if you press it, and H&P has. Since 2008, H&P's fleet of active U.S. rigs has grown 25%, while its three top competitors averaged 25% declines.

So far, the investment in capacity has paid off. In the U.S., AC rig utilization is above 85%, while less than 60% of older rigs are in use. Higher utilization and market-share gains have led to higher profit margins. Over the last two years, H&P's operating margins rose nearly three percentage points to 40.5%, while the average contract driller saw margins fall more than four percentage points.

Early this month, H&P more than doubled its quarterly dividend to $0.15 per share, the 40th consecutive annual hike. With a solid balance sheet (long-term debt just 5% of total capital) and rising free cash flow in the wake of capital-spending cuts, investors should expect more dividend hikes going forward, as well as a continuation of the share buybacks that started in the June quarter.

Conclusion

Over the last three months, H&P shares have returned an industry-high 16%. Lifted by higher-than-expected September-quarter profits and strong guidance, per-share-profit estimates for fiscal 2013 and fiscal 2014 have risen more than 5% over the last 60 days.

The consensus projects per-share profits will fall 5% this year and rise 8% next year. However, CEO Hans Helmerich says today's high oil prices should spur increased drilling activity in the year ahead, suggesting upside to the consensus even if natural gas remains sluggish. Obtain an annual report for Helmerich & Payne Inc. at 1437 S. Boulder Ave., Tulsa, OK 74119, (918) 588-5207, www.hpinc.com.

HELMERICH & PAYNE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '12
1.36
vs.
1.09
18%
51.71
-
41.82
11 - 9
Jun '12
1.37
vs.
0.99
27%
55.74
-
38.71
12 - 9
Mar '12
1.13
vs.
0.89
27%
68.60
-
51.69
16 - 12
Dec '11
1.29
vs.
0.94
23%
60.88
-
35.58
16 - 9
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
3.15
5.16
0.28
68.60
-
35.58
13 - 7
2011
2.54
3.90
0.25
73.40
-
39.65
19 - 10
2010
1.88
2.63
0.21
49.13
-
32.34
19 - 12
2009
1.89
3.53
0.20
43.27
-
17.01
12 - 5
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
86
84
83
96
51
71

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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