Nice Barron's article on HP this weekend
MONDAY, JANUARY 28, 2008
High-Tech Pay Dirt
By SANDRA WARD
WHEN THE WORLD'S OIL AND GAS PRODUCERS need a hand in drilling, they increasingly turn to Helmerich & Payne, perhaps the most efficient contract driller in the business.
The Tulsa, Okla.-based company (ticker: HP) has been expanding briskly and putting up record profits, even though the daily rates that energy outfits pay for contracted land rigs peaked more than a year ago. Its market share has more than doubled in the past three or four years, and the company expects to double its share again.
"What we are seeing is an opportunity to take market share...in a softer environment, because there is such a need for reinvestment and retooling,'' says CEO Hans Helmerich, the grandson of Walter Hugo Helmerich, a barnstorming pilot turned wildcatter who founded the company in 1920. Helmerich & Payne has been providing rigs and crews, mostly for land-based drilling, ever since.
Nowadays, the key is Helmerich & Payne's technologically advanced FlexRigs, which are more nimble than conventional rigs and better suited for the new demands of the exploration business. Gear like this means big savings for producers -- and steady orders for Helmerich & Payne. Result: The company has been able to increase its count of active rigs and maintain relatively strong daily-rate margins, all in the face of fierce competition.
The company's FlexRigs, like this one near Parachute, Colo., can ply shallow wells by drilling horizontally.
While Helmerich's average daily-rig margin -- the difference between a rig's daily revenues and its expenses -- declined by 8% in the fourth quarter, to $12,221, it was still 40% higher than those of its four largest competitors in the U.S.: Nabors (NBR); Patterson-UTI (PTEN);Grey Wolf (GW); and Unit (UNT). Moreover, the average number of active rigs at Helmerich rose by 38% in the fourth quarter from a year earlier, while its four major competitors combined witnessed a net reduction of 14%.
Now, as the industry enters a down-cycle resulting from too many rigs, industry watchers expect the company's results to continue to hold up better than others because of its standard-setting equipment, strong balance sheet, high return on capital, experienced crews, and, above all, smart management.
Even in a softening market that has seen many rigs idled, Helmerich & Payne has kept winning orders, and its rig-utilization rate stands at 95%, compared with 70% for its competitors. This lends support to the notion that there is an important segmentation going on in the drilling market, one that favors those with the most advanced and cost-effective rigs and punishes those with older, less-advanced rigs. The average age of rigs in the industry is 30 years old, compared with an average age of nine to 10 years for Helmerich & Payne's rigs.
The Bottom Line
The shares, up nearly 45% since the start of 2007, look poised to climb by at least another 40%, even as rivals with older gear are punished."They are really differentiating themselves from the competition," says Matt Lamphier, an analyst at Arnhold and S. Bleichroeder's First Eagle Funds, which holds Helmerich & Payne stock. "They are not accelerating, but they are weathering a drilling slump in North America better than their competition. These guys are executing in a flattish environment pretty well."
Helmerich & Payne is expected to post net income of $3.90 a share in fiscal 2008 (ending September), compared with $3.54 a share for 2007. |
