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.
Richard Arvedlund, a money manager at Cypress Capital Management in Delaware, holds shares and looks for a target price in the 50 to 60 range. That's up between 40% and 68% from the current level of about $35.70 a share and based on his assessment that Helmerich & Payne should trade at 13 times his earnings estimate of $4 a share for fiscal 2008, up from the current price-earnings multiple of nine. Helmerich, he says, deserves to trade at a premium to other land drillers.
THE COMPANY IS HARDLY STANDING still. In one promising move, it plans to increase its international exposure, where day rates are still rising and rig fleets are old and tired. It's pursuing new business in both Russia and North Africa. Currently, the bulk of Helmerich & Payne's fleet is U.S.-based; the company has 164 U.S. land rigs; 27 international land rigs; and nine offshore platform rigs.
Most of those rigs are FlexRigs, a design introduced in 1998 and now in its fourth generation of development. The new rigs are in high demand because of new challenges in exploration: About 45% of natural gas in the U.S. is now coming from what's considered to be "unconventional" wells, compared with 26% in 1996. These are wells that are often shallower and more technically demanding, requiring drilling at a horizontal angle to release gas.
Helmerich & Payne's FlexRigs allow oil and gas producers to save an average $158,800 per well. That's because they drill faster with fewer people and can be moved easily between wells, meaning less downtime. FlexRigs are also considered safer than most.
Oklahoma City-based Devon Energy (DVN), the No. 1 producer in the Barnett Shale natural gas field of North Texas, has 16 FlexRigs there and is expecting delivery of two more. "We are using the heck out of those things," says Devon spokesman Chip Minty. Williams Cos. (WMB), a Tulsa-based natural-gas producer, has leased 10 FlexRigs to extract gas from Colorado's Piceance Basin.
Of course, the fate of the U.S. drillers is largely tied to the price of natural gas. While the price of natural gas has been relatively stable in the past year, at around $7.50 per million British thermal units, the short-term outlook has grown more unfavorable because of concern about rising natural-gas inventories, imports of liquid natural gas and cutbacks in Canadian production that could drive more Canadian drillers into the U.S.
The rough conditions for contract drillers will doubtless spark more consolidation. But Helmerich & Payne, with a market value of $3.7 billion, is unlikely to participate, viewing deals as dilutive to quality and performance, says Hans Helmerich. "It is clear to us that we can have organic growth that has scale and significance,'' he says.
In an industry famous for booms and busts, that kind of independent thinking could reward shareholders for years to come.
THE COMPANY IS HARDLY STANDING still. In one promising move, it plans to increase its international exposure, where day rates are still rising and rig fleets are old and tired. It's pursuing new business in both Russia and North Africa. Currently, the bulk of Helmerich & Payne's fleet is U.S.-based; the company has 164 U.S. land rigs; 27 international land rigs; and nine offshore platform rigs.
Most of those rigs are FlexRigs, a design introduced in 1998 and now in its fourth generation of development. The new rigs are in high demand because of new challenges in exploration: About 45% of natural gas in the U.S. is now coming from what's considered to be "unconventional" wells, compared with 26% in 1996. These are wells that are often shallower and more technically demanding, requiring drilling at a horizontal angle to release gas.
Helmerich & Payne's FlexRigs allow oil and gas producers to save an average $158,800 per well. That's because they drill faster with fewer people and can be moved easily between wells, meaning less downtime. FlexRigs are also considered safer than most.
Oklahoma City-based Devon Energy (DVN), the No. 1 producer in the Barnett Shale natural gas field of North Texas, has 16 FlexRigs there and is expecting delivery of two more. "We are using the heck out of those things," says Devon spokesman Chip Minty. Williams Cos. (WMB), a Tulsa-based natural-gas producer, has leased 10 FlexRigs to extract gas from Colorado's Piceance Basin.
Of course, the fate of the U.S. drillers is largely tied to the price of natural gas. While the price of natural gas has been relatively stable in the past year, at around $7.50 per million British thermal units, the short-term outlook has grown more unfavorable because of concern about rising natural-gas inventories, imports of liquid natural gas and cutbacks in Canadian production that could drive more Canadian drillers into the U.S.
The rough conditions for contract drillers will doubtless spark more consolidation. But Helmerich & Payne, with a market value of $3.7 billion, is unlikely to participate, viewing deals as dilutive to quality and performance, says Hans Helmerich. "It is clear to us that we can have organic growth that has scale and significance,'' he says.
In an industry famous for booms and busts, that kind of independent thinking could reward shareholders for years to come.
