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Oil Prices Sent Helmerich & Payne's Stock Surging Last Month, but This Story Is What Matters

By Tyler Crowe – Jan 8, 2018 at 4:05PM

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Wall Street was monitoring oil prices in December, but Helmerich & Payne's recent acquisition extends its technology lead among oil drillers.

Shares of drilling rig company Helmerich & Payne (HP -0.95%) jumped 10.3% last month. There is likely a multitude of factors that went into that result, including broader market gains, higher oil prices, and the recently passed tax plan. From a long-term investors perspective, though, it was the things the company did that received little to no fanfare that seem much more interesting. Let's take a look at what Helmerich & Payne has been up to that should be the big story few are paying attention to.

Two drilling rigs at work in field with mountains in background.

Image source: Getty Images.

It's the things a company can control that matter

There were a lot of stocks that saw large gains this past month as the S&P 500 posted an impressive 3.8% gain, so a lot of this past month's increase can simply be chalked up to the tide rising for all boats.

Something else that has helped Helmerich & Payne's stock is rising domestic crude oil prices. Throughout the month, the price for a barrel of West Texas Intermediate remained above $55 throughout the month. While Helmerich doesn't directly benefit from rising oil prices, a decent portion of oil & gas producers in the U.S. can economically tap their share reserves at that price. We have already seen higher spending from the independent oil & gas producers in the U.S., while some of the larger companies like ExxonMobil and Chevron plan to ramp up shale spending significantly. 

Larger spending means more rigs, and more rigs mean putting more of Helmerich & Payne's idle fleet to work. This trend of higher oil prices and higher spending has been going on all year. At the start of 2017, Helmerich & Payne had about 91 rigs deployed. As of the company's most recent investor update, that number climbed to 201. In fact, the rapid rate at which the company added new rigs to its active fleet was a significant operating cost that kept the company from posting any positive income results last year.  

The news event that received little to no attention was the company's acquisition of private company Magnetic Variation Services (MagVar). MagVar is a technology company that provides measurement while drilling tools that help drillers more accurately place drill bits to optimize the placement of each well. This is Helmerich & Payne's second technology investment this year -- its first was MOTIVE Drilling -- related to more accurate drilling. It's pretty obvious to see that the company is looking to further advance its technology lead over its peers to attract more customers to its idle fleet.

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What a Fool believes

Most of the things that drove Helmerich & Payne's stock in December were things that were largely out of its control. When building an investment thesis, increased oil prices and the ability to tap shale economically at this price point is a positive sign, but it isn't anything upon which you can build the base of a thesis.

What is interesting about Helmerich & Payne as a potential investment is that it has the ability to leverage this situation better than anyone else in the business. Not only does it have the most rigs to deploy -- about 100 remain on the sideline, but most of them already have high-end specifications that can handle the complex jobs producers demand these days. This most recent acquisition is further proof of the company's commitment to staying ahead of the pack with technology, and it has helped the company produce the best margins in the business. 

The company has positioned itself incredibly well for 2018. Its fleet utilization rate has increased by leaps and bounds and should result in much better income results. Also, as the amount spent on rig reactivations becomes a much smaller portion of its revenue, it is likely going to start posting postiive income results soon. 

Tyler Crowe owns shares of ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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