We have upgraded our recommendation on contract drilling
Helmerich & Payne Inc.
) to Neutral from Underperform, reflecting a balanced risk/reward
Incorporated in 1940, Helmerich & Payne is engaged in the
contract drilling of oil and gas wells in the U.S. and
internationally. The company supplies drilling rigs, equipment,
personnel and camps on a contractual basis to explore and develop
oil and gas from onshore areas and from fixed platforms,
tension-leg platforms, and spars in offshore areas.
Helmerich & Payne's contract drilling business consists of
three reportable business segments: U.S. land drilling, offshore
drilling and international land drilling.
Helmerich & Payne is a major land and offshore drilling
contractor in the western hemisphere, having the youngest and most
efficient drilling fleet. The company specializes in shallow to
deep drilling in oil and gas-producing basins of the U.S. and in
drilling for oil and gas in international locations.
We believe Helmerich & Payne's technologically-advanced
FlexRigs are the key to its success, helping to increase its count
of active rigs and maintain relatively strong daily-rate margins
even during the times of market uncertainty. The company's
proprietary FlexRig design makes the rigs move faster than
conventional rigs, drill quicker and more efficiently, and allows
for a safer operating environment.
As such, these are better suited for the new demands of the
exploration business and therefore, command higher dayrates and
utilization than rigs from other land drillers.
The company's modest capital expenditure requirements and strong
balance sheet have been real assets in this highly uncertain period
for the economy. Leverage is low with a debt-to-capitalization
ratio of 6.1% as of June 30, 2012.
Helmerich & Payne has always been extremely conservative
with the allocation of capital and the use of leverage on its
balance sheet. This not only helped insulate the company during the
recession, but also led to the generation of $434 million in profit
last fiscal year, despite volatile prices, credit restrictions and
seizure of rigs by the Venezuelan government.
HELMERICH&PAYNE (HP): Free Stock Analysis
PATTERSON-UTI (PTEN): Free Stock Analysis
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However, weak natural gas fundamentals and the challenging
international operational scenario remain areas of concern. The
glut in domestic gas supplies still exists, with storage levels
remaining significantly above their five-year average. This will
continue to weigh on natural gas prices in the near-to-medium term.
Helmerich & Payne, which specializes in shallow to deep
drilling in gas producing basins of the U.S., remains particularly
exposed to this situation.
Finally, we expect investor sentiment toward the company to remain
lukewarm, considering Helmerich & Payne's below par dividend
yield and miniscule payout.
Given these concerns, we see Helmerich & Payne shares
performing in line with the broader market. Our new long-term
Neutral recommendation is supported by a Zacks #3 Rank (short-term
Hold rating), in line with its rig contractor peer
Patterson-UTI Energy Inc.