Helmerich & Payne (HP, Financial) operates as a contract drilling company in South America, the Middle East, and Africa. The company is a market leader in U.S. land drilling with a focus on high quality customer base. As the U.S. onshore drilling industry slumps, Helmerich & Payne stock has declined by 36.6% in the last one year.
While the stock looks resilient at current levels, I am of the view that investors can wait on the sidelines before considering exposure to Helmerich & Payne. The best time to consider exposure to the stock would be the second half of 2015. The reason is that oil and gas companies have revised their capital expenditure spending in 1Q15 and a second revision of spending for 2015 is likely after 2Q15. Once there is more clarity on the new capital spending pattern, Helmerich & Payne is likely to consolidate and move higher.
This article will discuss the reasons that make Helmerich & Payne an excellent investment from a long-term perspective. The balance sheet is the first big positive for Helmerich & Payne. As of December 2014, the company had $252 million in cash and equivalents while the total balance sheet debt was just $80 million. Therefore, the company is net debt free, and this is a big positive in difficult times. Recently, Helmerich & Payne has announced a $500 million senior note offering due 2025. Even if that debt is considered, the company’s net debt position is very comfortable, and the financial flexibility is high.
The second point that is positive about Helmerich & Payne is the company’s strong revenue visibility. As of December 2014, the company had an order backlog of $4.6 billion, and this gives strong cash inflow visibility for 2015. I am of the view that the company’s order backlog is likely to decline due to cancellation of long-term contracts on bad market conditions. Even after that, Helmerich & Payne is well positioned to generate decent operating cash flow for 2015. I am discussing the cash flows as Helmerich & Payne has a dividend payout of $2.75 per share and a dividend yield of 4.3%. I believe that this is sustainable for 2015.
Another point that I want to mention here is that Helmerich & Payne has increased its market share in U.S. land drilling from 9% in October 2008 to 17% as of February 2015. The increase in market share has come to modern onshore rigs that give Helmerich & Payne an advantage over peers. As of December 2014, Helmerich & Payne was a leader in land AC drive rigs in the United States. A superior rig fleet also allows the company to command a higher margin as compared to peers.
From a growth perspective, Helmerich & Payne has 40 new FlexiRigs scheduled for delivery in 2015 and six new FlexiRigs for delivery in 2016. All these rigs have multi-year contracts and therefore are a source of incremental revenue growth in the coming 1-2 years. While this growth might be offset by decline in revenue due to cancellation of rig contracts, the overall cash flow is likely to remain decent in 2015.
In conclusion, Helmerich & Payne is certainly an attractive stock to consider for the long-term. However, investors need to wait in the sidelines for another 3-6 months before considering exposure to the stock. With the company being almost debt free, the financial flexibility for growth will be high when the onshore drilling market recovers. Further, with a leading position in the U.S. onshore industry, the company is likely to create significant long-term value for shareholders.
