How Safe Are the Dividends of These 3 Oil Drillers?

Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Personally, I believe that one of the cheapest sectors in the market right now is the oil services sector, including oil and gas drilling companies.  Recently, these drillers have been sold-off as investors are concerned that the the number of hydrocarbon wells being drilled in the US is starting to fall, as the shale oil boom could be reaching its peak.

However, these companies could be due for a positive correction and move higher when the market realizes that, compared to the rest of the market, the oil & gas gas drillers sub-sector is undervalued while demand for drilling services remains strong.

But do these companies offer a secure dividend that can be relied upon while waiting for the turnaround?

The contenders

<table> <thead></thead> <thead> <tr><th> <p><strong>Company</strong></p> </th><th> <p><strong>P/E</strong></p> </th><th> <p><strong>Dividend yield</strong></p> </th><th> <p><strong>EPS</strong></p> </th><th> <p><strong>DPS</strong></p> </th><th> <p><strong>Payout Ratio</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Helmerich & Payne</strong></p> </td> <td> <p>11</p> </td> <td> <p>1%</p> </td> <td> <p>$5.70</p> </td> <td> <p>$0.6</p> </td> <td> <p>7.7%</p> </td> </tr> <tr> <td> <p><strong>Ensco</strong></p> </td> <td> <p>10.9</p> </td> <td> <p>3.4%</p> </td> <td> <p>$5.40</p> </td> <td> <p>$2</p> </td> <td> <p>30%</p> </td> </tr> <tr> <td> <p><strong>Nabors Industries </strong></p> </td> <td> <p>24.8</p> </td> <td> <p>1%</p> </td> <td> <p>$0.70</p> </td> <td> <p>$0.2</p> </td> <td> <p>6.7%</p> </td> </tr> </tbody> </table>

Ensco (NYSE: ESV) offers its investors a dividend yield of 3.4%, which is 1.4% above the market average and is covered nearly three times by earnings per share. Meanwhile, both Helmerich & Payne (NYSE: HP) and Nabors Industries (NYSE: NBR) offer investors token dividend yields of 1%, which appear to be easily covered by earnings per share. But how do their cash flows stack up?

Helmerich & Payne 

<table> <thead></thead> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p><strong>Q2 2012</strong></p> </th><th> <p><strong>Q3 2012</strong></p> </th><th> <p><strong>Q4 2012</strong></p> </th><th> <p><strong>Q1 2013</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p> Net Operating Cash Flow</p> </td> <td> <p>$897</p> </td> <td> <p>$462</p> </td> <td> <p>$977</p> </td> <td> <p>$1,000</p> </td> </tr> <tr> <td> <p>Capital Expenditures</p> </td> <td> <p>-$880</p> </td> <td> <p>-$329</p> </td> <td> <p>-$694</p> </td> <td> <p>-$1,100</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>-$884</p> </td> <td> <p>-$309</p> </td> <td> <p>-$667</p> </td> <td> <p>-$1,050</p> </td> </tr> <tr> <td> <p>Cash Available For Financing Activities</p> </td> <td> <p>$13.0</p> </td> <td> <p>$153.0</p> </td> <td> <p>$310.0</p> </td> <td> <p>-$50.0</p> </td> </tr> <tr> <td> <p>Cash Dividends Paid - Total</p> </td> <td> <p>-$21</p> </td> <td> <p>-$22</p> </td> <td> <p>-$27</p> </td> <td> <p>-$30</p> </td> </tr> <tr> <td> <p>Issuance/(Reduction) of Debt, Net</p> </td> <td> <p>$25</p> </td> <td> <p>($167)</p> </td> <td> <p>($10)</p> </td> <td> <p>($115)</p> </td> </tr> <tr> <td> <p>Dividend Cover From Cash Available For Financing Activities</p> </td> <td> <p>0.6</p> </td> <td> <p>6.9</p> </td> <td> <p>11.0</p> </td> <td> <p>0.0</p> </td> </tr> <tr> <td> <p> Free Cash Flow</p> </td> <td> <p>-$115</p> </td> <td> <p>$56</p> </td> <td> <p>$115</p> </td> <td> <p>-$83</p> </td> </tr> </tbody> </table>

*Figures in millions of dollars. Financing activities include dividend payouts, changes in capital stock and the movement of debt.

Helmerich & Payne offers its investors a token dividend yield of 1%, which at first glance appears well covered. That said, looking at the company's cash flow it would appear that the payout has only been sufficiently covered in two out of the last four quarters.

Helmerich's total dividend payout amounts to $25 million on average per quarter, about 3% of the company's operating cash flow for Q1 2013. This leads me to believe that the payout is relatively safe, based on its small size in relation to the company's overall income.

In addition, during Q2 2012 and Q1 2013 when the payout was not wholly covered, the company spent the majority of its operating cash flow on Capex and did not fund its spending through borrowing -- a good omen for the long-term financial health of the company.

Verdict: safe

Ensco

<table> <thead></thead> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p><strong>Q2 2012</strong></p> </th><th> <p><strong>Q3 2012</strong></p> </th><th> <p><strong>Q4 2012</strong></p> </th><th> <p><strong>Q1 2013</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Net Operating Cash Flow</p> </td> <td> <p>$463</p> </td> <td> <p>$577</p> </td> <td> <p>$612</p> </td> <td> <p>$342</p> </td> </tr> <tr> <td> <p>Capital Expenditures</p> </td> <td> <p>-$283</p> </td> <td> <p>-$536</p> </td> <td> <p>-$218</p> </td> <td> <p>-$168</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>-$226</p> </td> <td> <p>-$531</p> </td> <td> <p>-$193</p> </td> <td> <p>-$151</p> </td> </tr> <tr> <td> <p>Cash Available For Financing Activities</p> </td> <td> <p>$237.0</p> </td> <td> <p>$46.0</p> </td> <td> <p>$419.0</p> </td> <td> <p>$191.0</p> </td> </tr> <tr> <td> <p>Cash Dividends Paid - Total</p> </td> <td> <p>-$87</p> </td> <td> <p>-$87</p> </td> <td> <p>-$87</p> </td> <td> <p>-$116</p> </td> </tr> <tr> <td> <p>Issuance/(Reduction) of Debt, Net</p> </td> <td> <p>($194)</p> </td> <td> <p>($29)</p> </td> <td> <p>($142)</p> </td> <td> <p>($7)</p> </td> </tr> <tr> <td> <p>Dividend Cover From Cash Available For Financing Activities</p> </td> <td> <p>2.7</p> </td> <td> <p>0.5</p> </td> <td> <p>4.8</p> </td> <td> <p>1.6</p> </td> </tr> <tr> <td> <p>Free Cash Flow</p> </td> <td> <p>$93</p> </td> <td> <p>-$47</p> </td> <td> <p>$307</p> </td> <td> <p>$57</p> </td> </tr> </tbody> </table>

*Figures in millions of dollars. Financing activities include dividend payouts, changes in capital stock and the movement of debt.

Even though Ensco offers investors a 3.4% dividend yield it appears that the company is easily able to cover its payout.

Indeed, during the last four quarters the company has been able to cover its dividend with cash available 75% of the time. Moreover, the company has been paying down debt and the only period where it could not afford its payout was Q3 2012 where CAPEX spending took precedence.

Verdict: safe

Nabors Industries 

<table> <thead></thead> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p>Q2 2012<strong></strong></p> </th><th> <p>Q3 2012<strong></strong></p> </th><th> <p>Q4 2012<strong></strong></p> </th><th> <p>Q1 2013<strong></strong></p> </th></tr> </thead> <tbody> <tr> <td> <p> Net Operating Cash Flow</p> </td> <td> <p>$468</p> </td> <td> <p>$382</p> </td> <td> <p>$469</p> </td> <td> <p>$183</p> </td> </tr> <tr> <td> <p>Capital Expenditures</p> </td> <td> <p>-$494</p> </td> <td> <p>-$254</p> </td> <td> <p>-$297</p> </td> <td> <p>-$235</p> </td> </tr> <tr> <td> <p> Net Investing Cash Flow</p> </td> <td> <p>-$396</p> </td> <td> <p>-$237</p> </td> <td> <p>-$115</p> </td> <td> <p>-$124</p> </td> </tr> <tr> <td> <p>Cash Available For Financing Activities</p> </td> <td> <p>$72.0</p> </td> <td> <p>$145.0</p> </td> <td> <p>$354.0</p> </td> <td> <p>$59.0</p> </td> </tr> <tr> <td> <p>Cash Dividends Paid - Total</p> </td> <td> <p>$0</p> </td> <td> <p>$0</p> </td> <td> <p>$0</p> </td> <td> <p>-$13</p> </td> </tr> <tr> <td> <p>Issuance/(Reduction) of Debt, Net</p> </td> <td> <p>($98)</p> </td> <td> <p>$3</p> </td> <td> <p>($300)</p> </td> <td> <p>($2)</p> </td> </tr> <tr> <td> <p>Dividend Cover From Cash Available For Financing Activities</p> </td> <td> <p>0.0</p> </td> <td> <p>0.0</p> </td> <td> <p>0.0</p> </td> <td> <p>4.5</p> </td> </tr> <tr> <td> <p>Free Cash Flow</p> </td> <td> <p>-$26</p> </td> <td> <p>$128</p> </td> <td> <p>$171</p> </td> <td> <p>-$65</p> </td> </tr> </tbody> </table>

*Figures in millions of dollars. Financing activities include dividend payouts, changes in capital stock and the movement of debt.

Nabors is last on the last and has only started offering a dividend to shareholders during the first quarter of this year. However, the small payout is easily covered by cash available, as shown in the table above. Judging by how well the Q1 payout is covered, the second quarter payout, which has been paid at the same amount, should easily be covered by cash available as well.

Nabors has also been working on reducing debt in the four quarters shown above, once again showing good long-term fiscal prudence.

Verdict: safe

Conclusion

Although their dividend yields may be lower than the market average, both Nabors and Helmerich & Payne are easily able to cover their payouts with cash available, indeed, they also have cash to spare and are paying down debt. 

Elsewhere Ensco's higher-than-average yield is also well covered and offers investors an income play in the drilling market. Additionally, the company is paying down debt and could have cash available for further shareholder returns.

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Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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