Driller H&P Still Has Plenty Of Energy

2/10/2014


  Recent Price
$85
  Dividend
$2.50
  Yield
2.9%
  P/E Ratio
15
  Shares (millions)
109
  Long-Term Debt as % of Capital
2%
  52-Week Price Range
$89.39 - $55.78

Since paying out $0.07 per share in the December 2012 quarter, Helmerich & Payne ($85; HP) has raised its dividend three times, increasing it nearly ninefold. The contract driller's yield has vaulted to 2.9%, well above the industry average of 1.7%.

H&P can afford the dividend (it should consume less than one-third of operating cash flow) in large part because of its ability to consistently grow. Sales and per-share profits rose in each of the last 14 quarters, consistency not overlooked by the market. H&P has risen 52% since the end of 2012, more than triple the gain of the S&P 1500 Energy Sector Index. Despite the strong performance, H&P remains reasonably valued at 14 times projected earnings for the fiscal year ending September 2014.

And that fiscal 2014 profit projection looks conservative. Analysts project per-share-earnings growth of 8% in fiscal 2014 and 6% in fiscal 2015. H&P topped estimates in the December quarter and projected greater rig usage for the March quarter. While the company didn't get specific about the full year, its guidance extrapolates to higher utilization rates going forward, which should provide some extra juice to estimates already on the rise. H&P is a Focus List Buy and a Long-Term Buy.

Business overview

In the December quarter, H&P earned $1.56 per share excluding special items, up 11% and topping the consensus by $0.10 (7%). Sales rose 5%, doubling the consensus growth target.

The U.S. land-drilling unit (82% of revenue, 90% of operating income in the year ended December) managed sales growth of 5% and income growth of 7% in the December quarter. Rig margins rose 1% to $15,534 per day, reversing an unexpected decline in the September quarter. Utilization rose to 84% in the quarter from 82% in the September quarter. While it's too early to call this a trend, any idle rigs returning to service is encouraging.

Offshore drilling (7% of revenue, 5% of income) profits jumped 23% in the December quarter despite a sales gain of just 2%, as rig margins rose 6% to $27,449 per day. The international unit (11%, 5%) grew revenue 9% and income 40% in the quarter.

H&P distinguishes itself from peers technologically by focusing on FlexRig technology, which allows for higher prices. The gap has narrowed in recent quarters, but H&P can still charge 5% to 10% more than the average spot price for U.S. land drilling. Pricing has come under pressure industrywide, but H&P is seeing signs of stability in some areas.

Looking ahead

As of Jan. 30, H&P had agreements to build 35 new FlexRigs (adding to a fleet of 344 land rigs) this year, with more than 60% of the deals struck since the company reported September-quarter earnings. In March, H&P plans to accelerate its rig-building pace to three a month through at least the end of the year. Improvement in the new-build market suggests oil and natural-gas firms are ready to pick up their exploration-and-production spending, good news for a market long plagued by oversupply of rigs.

An annual report for Helmerich & Payne Inc. is available at 1437 S. Boulder Ave., Tulsa, OK 74119, (918) 748-5531, www.hpinc.com.

HELMERICH & PAYNE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '13
1.56
vs.
1.41
5%
84.87
-
68.87
15 - 12
Sep '13
1.44
vs.
1.36
4%
71.36
-
62.35
13 - 11
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
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
3.39
5.63
0.28
71.36
-
44.95
13 - 8
2012
3.15
5.16
0.26
68.60
-
35.58
13 - 7
2011
2.54
3.90
0.22
73.40
-
39.65
19 - 10
2010
1.88
2.63
0.20
49.13
-
32.34
19 - 12
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
72
73
91
95
98
86

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


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