H&P Still A Top Buy Despite Recent Dip

8/12/2013


  Recent Price
$66
  Dividend
$2.00
  Yield
3.0%
  P/E Ratio
12
  Shares (millions)
108
  Long-Term Debt as % of Capital
4%
  52-Week Price Range
$69.38 - $43.76

Shares of Helmerich & Payne ($66; HP) fell 5% in the two days after the drilling company delivered mixed results for the June quarter. Revenue from U.S. land operations fell 1.6%, causing H&P to miss consensus revenue targets even as it topped the profit consensus by more than 7%.

However, H&P has already recovered almost all of the ground lost after the earnings release. Despite a 19% return so far this year, H&P trades at 12 times trailing earnings, a discount of 14% to both its peer group and its three-year average P/E ratio.

H&P, which expects the rig-replacement cycle to continue for several more years as U.S. energy production ramps up, is a Focus List Buy and a Long-Term Buy.

Energetic future

H&P has assembled a newer, more efficient fleet than its rivals, with 91% of its rigs capable of the horizontal or directional drilling often needed to extract oil and gas from shale. Horizontal and directional drilling account for more than 70% of U.S. rig activity, up from about 50% five years ago.

With technical superiority comes pricing power. Average daily margin for H&P's land rigs reached $15.4 million in the June quarter, up 4.4% from a year earlier and at least 60% higher than the margins of its two largest competitors.

Of course, with the U.S. land-rig count unlikely to rise much this year and even high-end rigs oversupplied, H&P's competitive advantages alone won't drive the stock higher. Investors will want to see signs of growth. The consensus projects per-share-profit growth of 2% in the September quarter and a 1% decline in the fiscal year ending September 2014, targets that leave room for upside.

H&P holds 15% of the U.S. land-rig market, up from 13% a year ago, and continued share gains should drive growth. In addition, energy trends offer at least four reasons for optimism.

Higher production. At the end of July, U.S. oil production topped 7.5 million barrels per day, up 19% from a year ago. Dry natural-gas production is also growing, though not nearly as fast. About 95% of H&P's rigs drill for oil and liquids-rich gas, up from 75% in January 2012. The Department of Energy expects production of  oil and natural gas will rise in the year ahead.

Higher consumption. In July, U.S. oil producers supplied more than 19.5 million barrels of oil per day, up 3.7% from a year ago and reflecting the strongest consumption since 2008. U.S. natural-gas consumption rose 3.6% in the first five months of 2013, the largest gain since 2007.

Higher prices. Despite a dip in June and July, natural-gas prices have jumped 11% from a year ago and remain 19% above the average for 2012. Oil prices hover above $100 per barrel, up 14% from year-earlier levels. Higher energy prices make drilling new wells more attractive.

Lower stockpiles. At the end of July, the U.S. had 2.85 billion cubic feet of working natural gas in storage, down 11.5% from the same time last year and 1.2% below the five-year average. The glut that has weighed on natural-gas prices in recent years seems to be easing a bit.

An annual report for Helmerich & Payne Inc. is available at 1437 S.  Boulder Ave., Tulsa, OK 74119, (918) 742-5531, www.hpinc.com.

HELMERICH & PAYNE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '13
1.44
vs.
1.37
2%
66.02
-
55.78
12 - 10
Mar '13
1.36
vs.
1.13
9%
69.38
-
55.79
13 - 11
Dec '12
1.40
vs.
1.29
15%
57.19
-
44.95
11 - 9
Sep '12
1.36
vs.
1.10
8%
51.71
-
41.82
11 - 9
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
3.15
5.19
0.28
68.60
-
35.58
13 - 7
2011
2.54
3.90
0.25
73.40
-
39.65
19 - 10
2010
1.88
2.67
0.21
49.13
-
32.34
18 - 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
96
76
92
91
92
36
37

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com