Suddenly This Becomes a Dividend Play

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Prior to June 5, Helmerich & Payne (NYSE: HP) was seen as a solidly run contract drilling firm with a small dividend. The company made a surprising announcement that it would dramatically increase the yield making the stock interesting for the yield now. Or maybe it wasn’t that surprising considering the expected influx of cash and a strong balance sheet.

The company operates primarily as a contract drilling firm with a fleet including 302 land rigs in the U.S., 29 international land rigs and nine offshore platform rigs. The land fleet includes 300 proprietary FlexRigs.

Dividend details

Helmerich & Payne declared a dividend of $0.50 per quarter beginning with the third quarter of fiscal 2013 ending June 30. The dividend was increased more than 200% from the previous level of $0.15. The dividend is payable on Aug. 30 to shareholders of record at the close of business on Aug. 15. The new dividend yield is nearly 3.2%.

Selling equity positions for cash

Helmerich & Payne recently unloaded a significant portion of its equity portfolio in Atwood Oceanics. The company agreed to sell 4 million shares back to Atwood Oceanics and a financial institution for over $200 million providing significant cash to fund the much higher dividend.

After this transaction, the company still holds 4 million shares of Atwood Oceanics and 967,500 Schlumberger Limited shares. The value of these holdings equals roughly $286 million at current market prices. Future sales of these positions will help fund potentially higher dividends or even some stock buybacks if the company so chose.

Other yielding drillers

Other drilling-related stocks offer compelling yields already. Fellow contract land driller Nabors Industries (NYSE: NBR) only offers a 1% yield making Helmerich & Payne’s new yield more appealing. Nabors has nearly double the revenue base, but the stock is worth less due to a much worse balance sheet. Nabors carries a significant net debt load of nearly $4 billion making it less appealing than the net cash position of Helmerich & Payne.

Outside of land drilling, offshore drilling firms such as Transocean (NYSE: RIG) and Ensco (NYSE: ESV) offer similar yields already. Transocean offers a more compelling 4.5% yield while Ensco offers a similar 3.3% yield.

Both stocks are considerably larger than Helmerich & Payne. Surprisingly the offshore drillers command lower earnings multiples, even though this business line relies more on a diverse international market with longer-term contracts. In addition, the international markets have more favorable end user demand fundamentals with considerably higher commodity prices to fuel strong pricing and margins.

Transocean and Ensco trade at roughly 8 times forward earnings while Helmerich & Payne and Nabors trade at around 11 times forward earnings. Investors in the land drillers would have to be certain that drilling demand is set to expand dramatically in the next year to pay those higher multiples.

Bottom line

For yield investors, Helmerich & Payne should be more attractive now that the stock provides a yield in excess of 3%. In general, investors will invest in the sector based on the desirability of land versus offshore drilling. For now, the offshore drillers appear to offer the better valuation metrics while also providing higher dividends.

Helmerich & Payne does offer the unique low-risk balance sheet for any investors concerned about a future shock in the energy markets. Other than that, the company offers a good investment though better valuations and yields exist with other stocks in the general energy contract drilling sector.

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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool owns shares of Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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