Image source: Getty Images.

Anyone looking at the oil and gas industry today is much more aware of the risks involved in this industry than a couple of years ago. Years of peak oil fears plus the euphoria around shale made investors overlook how quickly this commodity business can see a rapid change in prospects. Today, investors are much more apprehensive about investing in this industry, even if it is a solid company like rig owner and lessor Helmerich & Payne (NYSE: HP).

Is the skepticism around investing in Helmerich & Payne justified? Let's take a look at the risks associated with Helmerich & Payne and its stock and why, over time, those risks may be a little overblown. 

The short-term risk

If you are looking at Helmerich & Payne today, then the biggest risk staring you right in the face is the lack of drilling activity going on in the oil and gas world. Even though we have seen a modest uptick in the active rig count in recent weeks, we're still at lows that are almost unheard of in the U.S. In the past few months, about 100 additional rigs have been deployed to put the active count at just north of 500. That sounds great, until you consider that prior to this downturn, the last time we were at 500 active rigs for this long was the 1860s

What is also discouraging is that, so far, Helmerich & Payne hasn't really been able to capture much of these gains in rig count. According to the company's most recent investor presentation, many of the gains in rigs have gone to older, less advanced rigs that are being hired by private equity companies that are trying to make a buck on their bargain basement purchases in recent years. Helmerich & Payne's fleet is comprised almost entirely of newer, more advanced rigs that command higher contract rates than these legacy rigs, and they are typically employed by the top producers that are willing to pay. 

The reason this may give some investors concern is that with so few of Helmerich & Payne's rigs in the field -- its utilization rate is about 27% today -- the company is posting a net income loss. This is little-visited territory for the company, as it hasn't posted a net income loss on a trailing-12-month basis in over 30 years. Clearly this is a situation investors don't want to see, but without any more improvement in oil and gas prices, we could see the company drag along like this for a while.

Longer-term certainty

As discouraging as this sounds, there is plenty of reason to believe that the company will be able to work through this downturn and actually be better suited for the future of oil and gas drilling in the U.S.

The first thing that should give investors confidence is that, despite the net income losses, Helmerich & Payne is still generating decent amounts of free cash flow that easily cover its dividend payments and even continue to put cash on the balance sheet. Even at today's amount of active rigs, Helmerich should be able to easily raise its dividend in 2107 and keep its Dividend Aristocrat status. It's even more encouraging to see that H&P's balance sheet is in much better shape than its peers's.

CompanyFree Cash Flow (TTM)Total Debt to CapitalNet Debt to EBITDA
Helmerich & Payne $396 million 8.1% N/A (more cash than debt) 
Patterson UTI Energy (PTEN -2.28%) $144 million 20.7% 1.8x 
Nabors Industries (NBR -6.12%) $550 million 48.2% 4.1x 

Precision Drilling (PDS -1.71%)

$10.7 million 47.5%  8.4x 
Unit Corporation (UNT)  ($20 million)  38.6%  3.7x 

Data source: S&P Capital IQ TTM = trailing 12 months.

This suggests that if the market were to remain at this level for some time, Helmerich & Payne is in fine shape to handle it, and could even gain some market share if others can't get their acts together.

Then, there is the possibility that we see a decent recovery in the industry. If that were the case, then Helmerich & Payne is even better positioned. Today, more than 85% of all drilling in the U.S. involves horizontal drilling and requires high-specification rigs. Of the amount of available rigs that meet these standards, Helmerich & Payne has more available than Patterson UTI, Nabors, Precision Drilling, and Unit combined. 

Image source: Helmerich & Payne investor presentation.

What a Fool Believes

If you look at Helmerich & Payne over a pretty short time horizon, then it's very easy to get caught up in the risks of the tepid rig market across the U.S. and the fact that Helmerich posted a loss for the first time in ages. The further we back out and look at the longer-term future, Helmerich & Payne looks much less risky. It has both the best fleet of rigs and the best financial foundation in the business that will help it work through today's and tomorrow's market much better than its competition. If you are looking for a long-term investment in the oil and gas industry, Helmerich & Payne looks like a pretty low-risk bet.