Are the Glory Days Over for This Driller?

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With the gains in drilling-rig efficiency limiting demand, are the glory days over for Helmerich & Payne (NYSE: HP  ) ? According to this WSJ article, the company and the CEO are credited with developing the next-generation drilling rigs used to create the U.S. energy boom.

With oil above $100, one would expect a driller to trade well. The domestic land-drilling market, however, has faced lower drilling-rig demand due to plunging natural gas prices and more importantly the dramatically improved efficiencies gained in the last couple of years. The stock is sitting close to all-time highs. Now investors must analyze whether future natural gas export demand and possible demand from Mexico can offset a weak domestic climate.

While H&P has had a technology lead for the better part of the last decade, investors have to wonder if the CEO isn't stepping up to the chairman position now that competitors Patterson-UTI Energy (NASDAQ: PTEN  ) and Nabors Industries (NYSE: NBR  ) are closing the technology gap.

Rig demand
The weekly Baker Hughes rig reports continue to show weak demand for drilling rigs. The demand that does exist is shifting in favor of the ones that have higher-horsepower AC-powered rigs that serve growing demand for horizontal drilling in unconventional shale plays.

H&P clearly leads the AC-rig sector with around 270 domestic rigs and 300 in total; Patterson-UTI is closing the gap with 117 APEX rigs. Nabors lists a fleet of roughly 245 premium-quality rigs that include some SCR-Plus rigs that reportedly match the capabilities of an AC-drive rig.

Impressive margins
H&P continues to maintain impressive margins even in the face of declining revenue. In fact, during Q2, H&P was actually able to increase the average daily margin by $244 per rig.On top of that, the company already has daily margins on the domestic land rigs that greatly exceed those of competitors Patterson-UTI and Nabors

Patterson now operates roughly 185 rigs in the U.S. and Canada with an average daily operating margin of $8,730 during the second quarter due to lower daily revenue of only $22,990 and higher costs.

Nabors saw an average daily operating margin of $9,388 per day during Q2 with new AC rigs working at average day rates of $22,265. The company had 183 rigs working with 134 of them being AC and 101 pad-capable.

The end of the Helmerich line
The year 2014 will begin with the end of a legacy at H&P, as the last Helmerich will step down in March as the CEO to become the chairman. In 1920, his grandfather founded the company. This move will place the first non-family member in charge of the business and question whether the decision relates to a desire to leave as the business is peaking. Though he has been in the business a long time, he is only 54 years old. 

At the annual shareholder meeting, Hans Helmerich will turn over the reigns to the current COO, John Lindsay. Mr. Lindsay has been with the company since 1987, providing tons of experience at the company. He was no doubt instrumental in the technological lead and surging rig demand built up in the 2000s.

Bottom line
With the stock near all-time highs from back in 2008 and competitors catching up in technology, the departure of leadership by Helmerich could signal the end of a decade of significant margin advantage due to technology leadership. H&P could have a difficult time maintaining daily margins at rates 50% higher than Nabors, Patterson-UTI, and new competition. The potential appears greater in the stocks closing the technology and rig gap.

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Related Tickers

9/30/2016 4:05 PM
HP $67.30 Up +2.04 +3.13%
Helmerich and Payn… CAPS Rating: ****
NBR $12.16 Up +0.36 +3.05%
Nabors Industries CAPS Rating: ****
PTEN $22.37 Up +0.60 +2.76%
Patterson-UTI Ener… CAPS Rating: **