Helmerich & Payne Stock: BHA On Bottom, Drilling Ahead (NYSE:HP)

Introduction

Looking into the drillers has been a pleasant surprise. They have been the “poor man” of the oilfield for so long that I’d lost interest for a good long while. Shame on me, knowing what I know about this business, as the strength in their business model was very predictable. It’s a fairly simple formula.

It goes something like this. Quit building rigs for a few years, wait for a demand increase from higher oil prices, then begin to raise prices and lengthen contracts, and shucks…the stock is bound to go up. It’s a jagged path as we all know, with sometimes two steps forward and three back. That’s largely where we are now, sitting near that third step back. The point is we are early in the capital cycle where profits are returning to the drillers. There are at least several good years ahead.

The current selloff has given us a gift to my mind. The stock is down from recent highs in the mid-$50’s, and looks poised to head higher with oil prices when the current recession panic subsides.

Helmerich & Payne, Inc. (NYSE:HP) has a lot going for it. Rising revenues from increases in the rig count, margin expansion from relentless demand, very little debt, a new variable dividend…it’s almost hard to believe I am talking about a driller.

I think investors looking for growth and modest income should put HP on their list for entry points. Put on your safety gear and I’ll tell you why.

The thesis for HP

Helmerich & Payne, Inc. is one of the oldest contract drillers participating in the market today with over a century of continuous service. Their longevity provides instant credibility and name recognition when courting clients. I have worked with them on projects where the fathers and grandfathers of key personnel had worked with or for HP. There is no shortage of Good Will when it comes to Helmerich & Payne. That said, it’s a numbers game these days, and they still must be competitive on contracts. HP is mainly a U.S. driller, but has rigs in major basins around the world.

With 176 rigs turning to the right the company represents about 22% of the active U.S. fleet of 780 or so. In addition to direct drilling services, the company provides a number of ancillary drilling-related services, consisting mostly AI modeling support and drilling efficiency software. Technologies like HP’s Bit Guidance System, provide backup to telemetry delivered third party Measurement While Drilling, Logging While Drilling-MWD, LWD, downhole tool information, to ensure that the bit stays in the reservoir to total depth-TD. This is a critical aspect of well construction and delivery, and may help to eliminate an unnecessary bit trip. A bit trip (pulling out of the hole to change the bit, and re-running) costs hundreds of thousands of dollars at a minimum. Ancillary services are accretive, but not game changers for the company as they are widely replicated though out the industry.

The key driver for HP is its fleet of Super-Spec “FlexRigs” that can walk across a drilling pad (either permanently in place or laid down for the purpose). HP has a nice video showing this feature in action, and I encourage you to give it a look. The old school alternative to walking, is dismantling the rig sections and crane-lifting individual pieces to flatbed trucks. Its several days of work commonly vs a few hours walking. There is also the elimination of crane-lifting risk to personnel to which oil companies are keenly sensitive. Anything that enhances safety makes using walking rigs is a no-brainer, and clients are demanding them. HP also has a good inventory of FlexRigs available for long term contract, representing upside to revenue and EBITDA as they go to work.

The ADNOC deal

This is a strong catalyst for long-term growth. As part of this JV, HP will sell 8-eight rigs to ADNOC drilling and took a $100 mm stake in the ADNOC IPO on the Abu Dhabi exchange. This alliance which includes technology support from HP to ADNOC, will give HP a hub in the MENA area to export more rigs, secure contract drilling deals, and of course, participate in the profits generated by ADNOC drilling.

Q-3, 2022

HP closed out their fiscal year in Q-3 having generated quarterly revenues of $631 million versus $550 million in the previous quarter. H&P generated $234 million in operating cash flow during fiscal 2022, which fully funded capex and the base dividend in Q3. HP has a minimal debt load of $550 mm with no maturities before 2031, $349 mm of cash on the books, and an untapped credit line of ~$1 bn.

HP has 180 rigs contracted, and they expect to end the first fiscal quarter with between 181 and 186 working rigs with expectations for a few additional as in early January, and with line of sight for up to 192 rigs by the end of fiscal Q2. (Q-1, by the calendar) CEO John Lindsay offered a bullish outlook for 2023 in their quarterly fiscal Q4 call.

“We expect our financial results for the first fiscal quarter of 2023 to follow the improving trend of the past two fiscal quarters, where strong demand from customers coupled with rollovers of term contracts, should continue to drive higher average levels of pricing across the active fleet.”

On September 7, 2022, the Board of Directors of the Company declared a quarterly base cash dividend of $0.25 per share, and on October 17, 2022 declared a supplemental cash dividend of $0.235 per share; both dividends are payable on December 1, 2022 to stockholders of record at the close of business on November 15, 2022, and represent a yield on cost of ~4%.

Company filings.

Risks

The key risks to our thesis for Helmerich & Payne, Inc. involve oil prices and the ever-tightening political constraints of the current administration. It’s difficult to think this could get worse, but it might. In those scenarios, HP might sink further. As recently as September, the stock hit the mid-$30’s.

Your takeaway

Helmerich & Payne, Inc. is trading right now at an EV/EBITDA multiple of ~5.3X. Growth in their rig count for Q-3 to 182 and rerating of average day rates toward spot rates of $40K should push revenue and cash flow toward $700 mm and cash flow toward $275 mm in Q-2. Keeping the multiple at 5.3X would require the stock to rerate toward the middle $50’s. Growth such as they are delivering might as well justify a slightly higher multiple.

Analysts have an overweight rating on the stock with price targets that range from the mid-$40’s to a high of $71.

Competitors Patterson-UTI Energy, (PTEN) and Nabors Industries, (NBR) trade in the same range, but have significantly more debt. A 6.0X for HP would seem reasonable to reward their tidier balance sheet, and rig availability, taking stock toward the low $60’s. None of that seems unreasonable to me once sentiment regarding the economic outlook and oil prices shifts.

I think Helmerich & Payne, Inc. makes a strong case for ownership at current levels, but the current flux in the market makes me hesitant to jump in. There are risks either way, but until we get a clear market signal-Fed pivot, supply shortfall, or anything other than what the market is throwing at us, I am going to watch Helmerich & Payne. If a big dislocation in the market occurred, and dragged the price of Helmerich & Payne, Inc. back toward $40, it might get me off the fence.