The Leading Land Drilling Company Offers a Huge Upside

By Piyush Arora - October 31, 2012 | Tickers: ATW, HP, PES, PDS | 0 Comments

• Email
• Print

The stimulus packages around the globe managed to improve the macroeconomic growth sentiment, which pushed up the crude oil prices. Crude rose nearly 28% since the lows it hit this year, but slid again as the lending to European nations declined. Additionally, the crude stock piles increased faster than the demand, which has put a downward pressure on the commodity. However, it should be noted that the industrial growth of China is expected to grow at a fast pace in the remaining 3 months of 2012.

Also India, which imports nearly 70% of its crude demands, is struggling with poor domestic production levels, forcing the Indian refiners to import even more crude oil. Also, the bottlenecked pipeline systems have led to temporary refinery shut downs in countries like Germany and Czech Republic. Don't forget that natural gas is rebounding, as its posing as a cheap and eco-friendly alternative to coal. Analysts expect a further upside in natural gas with the onset of winter. These reasons altogether offer the upside potential in the crude and natural gas pricing, and here are a few reasons why I’m bullish on Helmerich & Payne (NYSE: HP).

Helmerich & Payne is a drilling company that is involved in the exploration and extraction of crude and natural gas. With the prices of these commodities on the rise, oil and gas companies are looking to ramp up their production levels by exploring new areas, which brings Helmerich & Payne into business. The company was incorporated back in 1940, and provides its services for both land and offshore drilling.

The company's management reported that the company has 241 active US land rigs under contracts, with only 38 rigs lying idle. It is, however, the flex rigs that give H&P its competitive advantage. Flex rigs are more mobile, flexible, and comparatively easier to setup, which not only saves time but also operational costs. Out of 241 total rigs, the company has precisely 157 flex rigs, and having a large number of flex rigs gives H&P higher profit margins compared to most of its peers.

Additionally, the company has 36 flex rigs under construction, which are expected to be rolled out at the rate of 4 rigs per month. The company leads the industry in US land drilling, and has 29 international rigs and only 9 offshore rigs.

In the recent earnings release, H&P reported an EPS of $1.38, which beat the analysts’ estimates by 13.75%. Revenues rose by 27.3% compared to the last year's quarter, and the operating income margin stood at 27.3%. When compared to the previous quarter, the daily average revenue per rig stood at $28,096, which rose by 1.7%, and the daily operational cost per rig stood at $13,337 which saw a reduction of 3.8%.

Helmerich and Payne shares its market space with Pioneer Energy Services (NYSE: PES), Precision Drilling (NYSE: PDS), and Atwood Oceanics (NYSE: ATW).

Source: www.finviz.com

Amongst the peers, Helmerich & Payne has the second highest gross profit margin, and low debt/equity levels. Going by P/E multiples, all the companies appear similarly valued, but the PEG indicates that the peers of H&P are better valued.

In my opinion, oil exploration and drilling activity is going to pick up with the increasing crude prices. The company reported sound financial results, and has a great mix of fundamentals. Additionally, H&P is the leader in US land drilling, and it is for these reasons that Helmerich and Payne has a solid buy rating.

• Email
• Print
• Feedback