Forget Commodity Prices: 1 Company That Makes Money From the Drill Bit

Living by the drill bit is hard in the oil and gas business, unless you actually own the drill bit!

Jun 18, 2014 at 1:24PM

If you like the idea of investing in the energy Renaissance taking place in the United States, but are afraid of the inherent risk of fluctuating oil and natural gas prices, then it might be time to take a look at Helmerich & Payne (NYSE:HP). Indeed, drilling activity is more important than commodity prices for this industry supplier.

"Wildcatters" and volatility
Making money in the oil and gas business can be a risky proposition. You buy or lease land. Drill a hole in the ground and, using the best science and technology, hope it produces as planned. And then often volatile commodity prices can blow all that up. That's pretty much what happened to Chesapeake Energy (NYSE:CHK) when natural gas prices started to plummet.

The company spent heavily on property only to find that record low natural gas prices in 2012 forced it to record, "a noncash after-tax impairment charge of $2.022 billion... related to the carrying value of natural gas and oil properties." The land wasn't bad, falling commodity prices just meant it wasn't worth as much as the company thought. Worse, it loaded up on debt to buy the land. It's no wonder that Carl Icahn worked to oust Chesapeake Energy's founder and CEO.

CHK Chart

CHK data by YCharts

In fact, overlaying the spot natural gas price on Chesapeake Energy's share price is almost scary and shows the importance that commodity prices can have for drillers. Today, though, Chesapeake Energy is under new management, natural gas prices are rising, and the painful write-offs appear to be over.

Drilling is what counts
Cutting costs and paying down debt have been big focuses at Chesapeake Energy, but it hasn't stopped drilling. For example, its capital budget for this year is projected to be over $5 billion. Asset sales will help offset some of that cost, with an expected $4 billion of proceeds. At this point, the company has four properties where it's looking to drill more than 260 wells over the next two years. And that's nothing compared to the 10,000 plus locations it believes it can drill based on its land inventory.

This is all good news for Chesapeake Energy and its shareholders, but it shows the potential that Helmerich & Payne's business holds. That's because you can't drill a well without a drill rig, and Helmerich & Payne is one of the industry's largest contract drillers. The company started 2013 with 340 drill rigs, about 300 of which were located in the United States. However, demand for high-tech rigs has led the company to buy more. Management's goal is to end 2014 with over 380 rigs.

(Source: Chappell, Oil City, Pennsylvania, via Wikimedia Commons)

And while some drillers have pulled back, Helmerich & Payne estimates its market share at about 15%. Its closest competitor clocks in at around 11%. That's a nice picture, but it's the change over the last five years that tells the story. Helmerich & Payne's market share in 2008 was 8% with two competitors claiming 13% and 14%, respectively. That's a big switch partly made possible by the fact that Helmerich & Payne's rig count has gone up every year since 2005.

Helmerich & Payne's sales and earnings have also been heading higher. They have advanced in each of the last three fiscal years (years end September) after dipping in 2009 and 2010. With roughly 90% of its rigs contracted, solid demand, and new rigs on the way, it looks like that upward trajectory is set to continue. And with a return on equity about five percentage points better than its peers, Helmerich & Payne is likely to be a standout performer.

The driller or the drill bit?
When it comes to investing in the oil and gas industry, you don't have to settle in for the volatile ride that often accompanies a "wildcatter" like Chesapeake Energy. If you switch gears and look, instead, at industry service suppliers like Helmerich & Payne you might find a smoother and still quite profitable ride awaits you.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers