The Most Unlikely Energy Stock to Reach Dividend Aristocrat Status

Image source: Helmerich & Payne investor presentation.

To make matters even worse, demand for drilling rigs isn't exactly something that has increased over time. Ever since the 1960s, the number of total land rigs in use has swing wildly and is now close to 50% less than what we saw close to 50 years ago.

US Rotary Rigs data by YCharts

With this sort of operating environment, it's easy to see why it would be hard to establish a business that can reach dividend aristocrat status in this business. There's almost no way to generate the economic moat that a company like ExxonMobil or Chevron can, with their economics of scale and assets in different parts of the value chain to offset the effects of commodity prices.

Despite these challenges, Helmerich & Payne has been able to generate a market premium compared with its land drilling peers:

Image source: Helmerich & Payne investor presentation.

And it has returns on capital that are way out ahead of its competition:

Company Return on Capital (LTM)
Helmerich & Payne 11.1%
Nabors Industries 3.84%
Unit Corporation 0.90%
Patterson-UTI Energy 1.21%
Precision Drilling (0.15%)

Source: S&P Capital IQ.

What's in the sauce?

It would appear that Helmerich & Payne doesn't have a lot in common with ExxonMobil and Chevron, but there is one thing that does link them: effective and disciplined management teams. Having natural economic moats is effective only if a management team can use them effectively, and adept management teams can protect even smaller moats.

Take a look at the integrated majors. Chevron and ExxonMobil aren't the only ones that occupy this space, yet they're the only two that have been able to string together more than 25 years of disciplined capital allocation and well-managed balance sheets that have allowed them to raise dividends in each of those years.

Helmerich & Payne is very much the same in this regard. Even though the company has been working through a large turnover of its fleet to newer, higher-specification rigs that can handle modern drilling needs, it has been able to maintain a strong balance sheet with more cash on hand than total debt, and its expansion plans have lived within its operational cash flows every year since the financial crisis.

Up until 2014, Helmerich & Payne had one of the founding family members as its CEO, and the Helmerich family still holds the chairman of the board position. The current CEO, John Lindsay, has been with the company for close to 30 years now and has been part of the senior leadership for a decade. While this may not carry a whole lot of weight on Wall Street, longer-term investors should find comfort in knowing that the people heading the ship have a long tenure with the company and have seen it through multiple industry cycles.

Can it stay a dividend aristocrat with oil at $30 a barrel?

As good as Helmerich & Payne has been at handling market cycles in the past, this most recent one has been one of the worst we've seen in a long time. This also means that even some of the most stable companies out there could be at risk of seeing their dividends cut. Both ExxonMobil and Chevron have resorted to covering capital expenditures and dividend payments by issuing debt and selling off assets .

Helmerich & Payne is in that precarious position of being beholden to producers' spending levels, which are expected to decline again in 2016. To make things worse, the company's fleet of rigs is highly concentrated in North America, and the number of active rigs in the U.S. has declined at a pace much faster than the rest of the world.

US Rotary Rigs data by YCharts

The one thing Helmerich & Payne does have going in its favor in regard to its dividend, though, is that its dividend obligations aren't that immense. Over the past 12 months, the company's $298 million in dividend payments was 20% of the operational cash that came in the door, and its operational cash was only $15 million short of covering all capital expenditures and dividend payments. With over $700 million in cash on hand and the possibility to issue debt if it came down to it, there's still a bit of wiggle room before Helmerich & Payne needs to make any drastic moves with the dividend to preserve its current operations.

What a Fool believes

Despite not having the natural barriers to preserve a dividend such as ExxonMobil and Chevron, Helmerich & Payne has used smart capital allocation and a conservative approach to growth that has allowed it to weather multiple down cycles in the oil and gas industry while maintaining a dividend aristocrat status. This recent downturn carries the risk of tarnishing the company's track record, but investors looking to keep an active energy portfolio should flock to quality management teams such as Helmerich & Payne if they have an eye on the long term.

The next billion-dollar iSecret

The world's biggest tech company forgot to show you something at its recent event, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here .

The article The Most Unlikely Energy Stock to Reach Dividend Aristocrat Status originally appeared on

Tyler Crowe owns shares of ExxonMobil. You can follow him at Fool.comor on Twitter, @TylerCroweFool.The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron. 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 .

Copyright © 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More