Will Helmerich & Payne, Inc. Raise Its Dividend in 2017?

Image source: Getty Images.

I think after more than two years of tough conditions in the energy industry, investors are justifiably concerned whether the stocks in their portfolio will be able to continue to increase dividend payments (or, in some cases, pay a dividend at all). Investors in Helmerich & Payne (HP -0.99%), though, shouldn't be too worried. Even though the company operates in an industry that doesn't lend itself well to stability and the ability to consistently raise dividends, investors should feel pretty confident that H&P can raise its payout in 2017. Here's why. 

It's got the room

The first question that anyone needs to answer with a company raising its dividend is whether that company has the current earnings power to do so. If you were to take a gauge of the rig market in general, it wouldn't look as though Helmerich & Payne would have the ability to raise its dividend because the market has been so weak. Today's active rig count is just north of 500 in the U.S. That is a huge relief from a few months ago, but it's still in the category of historical lows that we haven't seen in decades. 

There are even some hints of this in Helmerich & Payne's operational results. Last quarter, the company's utilization rate -- the amount of active rigs compared to total rigs in the fleet -- stood at a scary-low 24% for its U.S. land operations. While the company did post slightly better results from its offshore and international land segments, U.S. land rigs account for more than 77% of the company's revenue even today.

Looking deeper into the results, though, there is definitely some hope. Even though those results above look disastrous, the company is still converting operations to high rates of free cash flow. Over the three fiscal quarters in 2016 for H&P, the company has generated $404 million in free cash flow while dividend payments over that time were $224 million. Also, with more than $900 million in cash and $500 million in debt on the balance sheet, there is little worry of a situation where the comapny is too strapped for cash. So even if the rig market didn't do Helmerich & Payne any favors, it looks as though the company at least has the ability to raise its dividend on its balance sheet strength alone.

The market is starting to work in its favor

Fortunately for Helmerich & Payne and its investors, it may not have to come down to leaning on the balance sheet to meet its dividend payments. There are signs that the market is picking back up. More importantly, though, it's picking up in a way that favors Helmerich & Payne. 

Helmerich & Payne's management had quite a bit of foresight when it came to the shale revolution and its impact on the U.S. land drilling industry. In less than a decade, horizontal drilling -- the drilling technique that makes shale possible -- has become the predominant drilling technique in the US. 

Image source: Helmerich & Payne investor presentation.

It takes a high-power rig with several specialty specifications to drill these types of wells, and Helmerich & Payne has converted almost all of its fleet to rigs that can handle this kind of work. In fact, Helmerich & Payne has more rigs available that have the specs for shale drilling than all of its major competitors combined.

Rig counts are on the rise in the U.S. as prices stabilize and producers are finding more and more ways to lower costs. That suggests that this past quarter was at or near the bottom for Helmerich & Payne, in terms of its results, and it's likely that things should improve from here. 

It's got a reputation to uphold

The final reason the company will raise its dividend next year is that the company has raised its payout every year for 43 years in a row. For dividend investors, these kinds of things matter because it shows that management clearly has an eye on building a business that can continue to grow that payout year in, year out.

What a Fool Believes

Helmerich & Payne's management has shown itself to be a good steward of investor value over the years. In an industry that is notorious for boom-and-bust cycles, management has guided it in a way that has allowed it to maintain its dividend payments even today in what could arguably be called the worst rig market in over a century. 

With some small signs that the market is improving and a superb financial position, it would take some huge unforeseen issue to keep Helmerich & Payne from raising its dividend in 2017.