In late 2018 oil suddenly dipped into bear market territory, once again showing investors how volatile the key energy commodity can be. But in both good oil markets and bad, oil companies are always looking for an edge. Helmerich & Payne, Inc. (HP 0.42%) has the expertise and technology to help its customers stay at the forefront of the industry, and that, in turn, should ensure this nearly 100-year-old company's success for years to come.
A great top-level story
Helmerich & Payne offers investors a robust 5% dividend yield. It has increased the dividend annually for an incredible 46 consecutive years, despite operating in a highly cyclical industry. And the company's debt makes up just 10% or so of its capital structure -- low for any industry, let alone the drilling services provider niche.
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Helmerich & Payne is a very compelling income investment if you can get comfortable with the volatile nature of oil and natural gas drilling. Now add in the fact that it has a leading position in onshore U.S. drilling. This segment of the global oil industry has experienced a huge upswing in recent years, and looks set to remain a major, and growing, force in the energy market. That positions Helmerich & Payne for a solid future.
Check out the latest earnings call transcript for Helmerich & Payne.
Some under-the-headline statistics
But there's more to this story than these headline figures. When you dig into Helmerich & Payne's rig portfolio, you start to see some interesting numbers. For example, it has around 350 U.S. land rigs, with 238 currently under contract. So roughly 68% of its fleet is being utilized right now.
However, within that total there are some very important differences. It has 225 rigs that fall into the super spec category, which are the most advanced rigs right now. They are more efficient and cost-effective than older rigs, and include features like the ability to move, on their own, from drill site to drill site. Of those 225 rigs, 213 are under contract, for a 98% utilization rate. It makes sense: The best rigs are the ones that are seeing the most demand.
One of Helmerich & Payne's long-term goals is to be at the leading edge of the industry technology-wise. So it is always looking for ways to upgrade its portfolio. Right now it has another 52 rigs that it can upgrade to super spec status. This collection of rigs is only 31% utilized today, so upgrading rigs won't disrupt customers, and will likely lead to more rigs being put to work over time. In fact, the company upgraded 14 rigs in the fiscal first quarter of 2019, and believes that it will complete around 25 or so for the full fiscal year.
HP Financial Debt to Equity (Quarterly) data by YCharts
With an upgrade cost of up to $8 million dollars, these upgrades are only being made when there is demand. Helmerich & Payne isn't speculating with investor money. But the benefit is material, with super spec rigs commanding a premium price over older rigs. An upgrade can pay for itself in as little as 12 months, though the more expensive upgrades can take up to 30 months.
The bigger picture here is that Helmerich & Payne is at the leading edge of the drilling services industry, and intends to stay there. And that includes more than just its rigs. It also offers a suite of productivity services that are increasingly in demand as well. When you step back, Helmerich & Payne is a well financed company in a highly cyclical sector that has positioned itself as an industry technology leader. With more upgrades to come in fiscal 2019, volatile energy prices aren't likely to derail it as it continues to execute its long successful game plan.
Not perfect, but really good
To be fair, Helmerich & Payne isn't a great fit for every investor. Its stock price and financial results will wax and wane along with oil prices and drilling activity. There's little the company can do about that except prepare for the inevitable ups and downs. It's clearly done that work (low leverage, industry leading rigs), while also managing to reward investors with consistent and growing dividends. With the current upgrade cycle still ongoing, income investors willing to stomach a little volatility shouldn't be worried that falling oil prices will crush Helmerich & Payne's business. Focusing on being at the forefront of technology should ensure that doesn't happen.
