Helmerich & Payne (HP, Financial) provides contract drilling services to primarily US based oil and gas producers. The company is a pioneer of horizontal drilling which has driven growth. Helmerich & Payne has seen revenue per share grow at over 13% a year over the last 10 years. In total, Helmerich & Payne has 302 land rigs, 9 offshore rigs, and 29 international rigs.
Helmerich & Payne is a member of the exclusive Dividend Achievers Index. Only stocks with 10 or more consecutive years of dividend increases are eligible for inclusion in the Dividend Achievers Index. Helmerich & Payne has not reduced its dividend payments (excluding special dividends) since it initiated dividend payments in 1987. In total, the company has paid steady or increasing dividends for 28 consecutive years.
This article covers the growth prospects and competitive advantage of Helmerich & Payne. The company is ranked in The Top 20 using The 8 Rules of Dividend Investing due to its high revenue per share growth rate of over 13%, low P/E ratio of under 10.8, and high dividend yield of 3.8%. Learn more about the company below.
Business Overview
Helmerich & Payne divides its drilling operations into 3 distinct segments: U.S. Land, Offshore, and International Land. In addition to its primary drilling operations, Helmerich & Payne also has a commercial real estate subsidiary and a research and development subsidiary focused on rotary steerable technology. The company’s rotary steerable R&D division operates under the Terra Vici Drilling Solutions name. The commercial real estate subsidiary owns the following:
- Tulsa, OK shopping center with 441,000 leasable square feet
- Approximately 1 million square feet of leasable multi-tenant industrial warehouse space
- 210 acres of undeveloped real estate
Helmerich & Payne’s non-drilling operations generated just 0.4% of operating income for the company in its fiscal 2014. These operations are consolidated in the ‘other’ category below. Helmerich & Payne’s percentage of total revenue generated for each of its four primary segments in full fiscal 2014 is shown below:
- U.S. Land – 83.3% of total revenue
- Offshore – 6.7% of total revenue
- International Land – 9.6% of total revenue
- Other – 0.4% of total revenue
As you can see from the data points above, the U.S. Land segment is by far the most important to Helmerich & Payne. The Offshore and International Land drilling segments are important, but are not the core of what Helmerich & Payne is.
Competitive Advantage & Growth Prospects
Helmerich & Payne is the drilling industry leader in North America. The company has benefitted greatly from the boom in unconventional North American oil production. Helmerich & Payne has grown its US rig count from 49 in 2001 to 371 today. Helmerich & Payne has increased its market share from 9% in 2008 to an industry leading 15% today. Other significant players include Patterson-UTI (PTEN, Financial) with an 11% market share, and Nabors Industries (NBR, Financial), which also has an 11% market share.
Helmerich & Payne has seen tremendous EPS growth over the last decade. EPS have grown at a compound rate of 22% a year over the last decade. Helmerich & Payne’s rapid growth has been driven by its leadership position in more difficult horizontal drilling. The company’s AC FlexRigs are in high demand due to their efficiency. The image below shows that Helemerich & Payne’s rigs have both higher margins and a higher utilization rate than competitors:
Source: H&P Capital One Energy Conference Presentation
Researchers and analysts have gone on record stating that Helmerich & Payne is the best player in its industry. The company has a competitive advantage in unconventional North American drilling. The company’s rapid growth over the last decade and long dividend history show Helmerich & Payne can reward shareholders with both capital appreciation and dividend growth.
Helmerich & Payne’s long-term growth will be driven by increasing global demand for energy. The company is well positioned to take advantage of growing oil production in North America thanks to its best-in-class rig fleet. In the short-run, the company may see weak or negative growth as low oil prices reduce oil production in North America. In the long-run, I expect Helmerich & Payne to continue growing both dividends and EPS at a double-digit pace and well in excess of overall market growth.
Recent Price Weakness & Valuation
Helmerich & Payne’s stock has experienced large losses recently. The stock is down about 37% over the last 6 months. While this volatility might scare away some investors, it has created an excellent buying opportunity for those who can withstand short-term price fluctuations and possible sluggish growth over the next few months to few years. Helmerich & Payne is currently trading for a P/E ratio under 11.
Helmerich & Payne has traded at an average discount of about 0.7x to the overall S&P 500 over the last 6 years. The company is currently trading at about a 0.5x discount to the S&P 500’s P/E ratio. I question the market’s wisdom of having a stock which has experienced 20% EPS growth over the last decade have a P/E ratio well under that of the overall market’s. I believe the company should trade at a premium to the S&P 500’s P/E ratio do to its competitive advantage over its peers and its rapid historical growth and potential future growth. As a result, I believe Helmerich & Payne to be significantly undervalued at this time.
A potential catalyst for Helmerich & Payne is rising oil prices. If (when) oil prices rebound, the company will likely see its stock price and P/E ratio surge upward. Shareholders can wait for oil prices to recover and get paid 3.8% a year from Helmerich & Payne’s dividend. The company has a payout ratio of about 43.4%; even a 50% drop in earnings would not put the company’s dividend payments in jeopardy.
Final Thoughts
Helmerich & Payne is a high quality business trading at a discount. The company makes an excellent long-term play for dividend growth investors who believe oil prices will eventually recover. Helmerich & Payne is a favorite of The 8 Rules of Dividend Investing due to its high yield, low P/E ratio, and strong historical growth rate. The biggest downside the company’s stock has is 44.7% stock price standard deviation, which is extremely high. Helmerich & Payne’s exposure to oil prices is what has caused the volatility in the stock. Investors who can stomach high volatility will likely see strong total returns over a 5 or 10 year period from Helmerich & Payne.
