Published by Bob Ciura on June 3rd, 2017
The oil and gas industry has long been associated as a ‘boom-and-bust’ business.
Big Oil was riding high from 2010-2014, as oil prices jumped above $100 per barrel in the U.S. But the good times abruptly ended, as new drilling technologies enabled robust production growth.
This has dragged oil prices down since then, which has taken Helmerich & Payne (HP) down with it. The stock has lost nearly one-third of its value year-to-date.
On the other hand, right now could be a good time for income investors to take a closer look at Helmerich & Payne.
The sell-off over the course of 2017 has pushed Helmerich & Payne’s dividend yield above 5%.
Helmerich & Payne’s dividend yield is more than double the S&P 500 Index, which has an average yield of just 2%.
If oil prices can at least stabilize, Helmerich & Payne could be an attractive stock for investors interested in high dividend yields.
Things were looking up for Helmerich & Payne as 2016 drew to a close. After hitting a low of $27 per barrel, crude oil rose above $50 per barrel by the end of last year.
However, U.S. producers continue to increase production, and OPEC’s recent supply cut extension was widely seen as a disappointment.
As a result, oil prices are back below $50 in the U.S, and Helmerich & Payne’s share price has followed suit.
Helmerich & Payne is a contract driller. It provides oil rigs and related drilling equipment.
The company has three operating segments:
- U.S. Land
- International Land
Helmerich & Payne’s U.S. Land segment is the core of the business. The company holds a 19% market share in U.S. Land rigs.
Source: UBS Oil and Gas Conference, page 6
Since drilling activity dries up when commodity prices fall, Helmerich & Payne is highly reliant on commodity prices.
H&P’s revenue fell by nearly 50% in fiscal 2016, due to weak oil and gas prices. The company lost $57 million for the year.
The good news is that conditions are starting to improve, and losses are moderating.
If oil prices continue to improve, it won’t be long before the company returns to profitability.
Helmerich & Payne has considerable operations in many of the premier shale plays and oil and gas basins in the U.S., such as the Permian Basin, Eagle Ford Shale, and Bakken Shale.
And, drilling activity has picked up throughout 2017.
Source: UBS Oil and Gas Conference, page 26
H&P’s expenses were higher than usual last quarter, as the company worked to re-deploy rigs that it had “cold-stacked”, or left idle.
This activity results in higher near-term costs, but the pick-up in drilling activity bodes well for the future.
In the U.S. land segment, H&P expects days of rig activity to increase by 30%-35% this quarter. Profit margin per land rig is expected to be $7,500 per day this quarter.
And, if oil prices continue to climb, H&P could see a return to profitability and growth.
A return to positive earnings-per-share would help boost H&P’s dividend growth prospects
The most important growth catalyst for Helmerich & Payne is higher oil prices. This would incentivize customers to put more rigs back into operation.
Only 52% of Helmerich & Payne’s rigs were contracted as of May 23rd, 2017.
Another growth catalyst investors should consider is technological advancement.
On May 22nd, Helmerich & Payne announced the $75 million acquisition of MOTIVE Drilling Technologies. The deal barely registered in the financial media, due to its small size.
While the acquisition did not get much coverage, it could represent a major step forward for the company.
That’s because MOTIVE makes technologies that significantly increase the quality of drilled wells.
Source: UBS Oil and Gas Conference, page 36
MOTIVE makes an automated drilling system that vastly improves well quality, while significantly reducing labor costs. MOTIVE’s technology has been proven on more than 200 horizontal wells to date.
By making the acquisition, Helmerich & Payne is broadening its scope from rigs, to technology.
Increased viability of drilling automation could substantially lower Helmerich & Payne’s cost structure going forward.
This would be a huge plus for the company’s bottom line, and its dividend.
A company that loses money is a red flag for dividend investors. Losses can only be sustained for so long, before the dividend becomes at risk of a cut.
There are a few things that could help Helmerich & Payne avoid this fate. First, it has strong assets, which provide the company with considerable cash flow.
Even though Helmerich & Payne is losing money, most of the losses are due to depreciation. But, in terms of cash flow, the company remains in good condition.
For example, in 2016 Helmerich & Payne generated $496 million of free cash flow. This more than covered its dividend payments, which required $300 million of cash.
Next, the company has a strong balance sheet. Its debt-to-capitalization is much lower than its industry peers.
Source: UBS Oil and Gas Conference, page 4
Helmerich & Payne ended 2016 with $950 million in cash, equivalents, and marketable securities, compared with $492 million of long-term debt.
As a result, Helmerich & Payne’s dividend appears sustainable at the current oil price.
This is a difficult time to be in the oil and gas drilling business, but Helmerich & Payne has a leading industry position, and a strong balance sheet.
Oil and gas prices have turned lower once again, but still remain well above the 2016 low.
Income investors may want to consider taking advantage of Helmerich & Payne’s 5% dividend yield.
- Big Oil stocks are among the market’s biggest dividend payers. Click here to see why Royal Dutch Shell (RDS-A) and its 6.8% dividend yield could be attractive for income investors.
- Investors looking for high dividend yields from the oil and gas industry may want to take a closer look at royalty trusts. For a royalty trust with a 5% dividend yield and high-quality oil and gas properties, click here.