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The Most Unlikely Energy Stock to Reach Dividend Aristocrat Status

By Tyler Crowe - Jan 21, 2016 at 8:15AM

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Based on the industry, you wouldn't expect to see Helmerich & Payne on the dividend aristocrat list, but it's there.

Image Source: Helmerich & Payne corporate website.

There aren't a whole lot of companies in the energy space that have made the fabled dividend aristocrat list. The few that have are either the big industry stalwarts such as ExxonMobil (XOM 2.01%) or Chevron (CVX 1.60%), which have integrated business models that protect them from price swings, or are utilities and distributors that don't have much exposure to the price of the commodity in the first place.

Then there's Helmerich & Payne (HP 4.26%).

Of all the companies on the dividend aristocrat list from the energy sector, this drilling contractor doesn't fit the typical mold. Yet for 43 years straight, the company has kept its dividend streak alive. How is it possible? Let's look at why it almost seems impossible that Helmerich & Payne is on this list with energy giants such as ExxonMobil and Chevron and what quality it possesses that has kept it there.

We'd understand if it wasn't a dividend aristocrat
Probably the only group of companies more susceptible to the swings in oil and gas prices than the companies that produce it are the ones that contract services to those producers. Their entire business is related to the producers' willingness to spend money on new wells. Not only does this mean that service companies will see drilling activity rise and fall, but they also have to fight off competing service companies for contract rates. 

Helmerich & Payne operates in this realm, specifically as the owner of drilling rigs that it contracts out to producers. This is a highly fragmented, extremely competitive business that has multiple players fighting for contract work.

Image source: Helmerich & Payne investor presentation.

To make matters even worse, demand for drilling rigs isn't exactly something that has increased over time. Ever since the 1960s, the number of total land rigs in use has swing wildly and is now close to 50% less than what we saw close to 50 years ago.

US Rotary Rigs Chart

US Rotary Rigs data by YCharts

With this sort of operating environment, it's easy to see why it would be hard to establish a business that can reach dividend aristocrat status in this business. There's almost no way to generate the economic moat that a company like ExxonMobil or Chevron can, with their economics of scale and assets in different parts of the value chain to offset the effects of commodity prices. 

Despite these challenges, Helmerich & Payne has been able to generate a market premium compared with its land drilling peers:

Image source: Helmerich & Payne investor presentation.

And it has returns on capital that are way out ahead of its competition:

CompanyReturn on Capital (LTM)
Helmerich & Payne 11.1%

Nabors Industries

Unit Corporation 0.90%
Patterson-UTI Energy  1.21%
Precision Drilling

Source: S&P Capital IQ.

What's in the sauce?
It would appear that Helmerich & Payne doesn't have a lot in common with ExxonMobil and Chevron, but there is one thing that does link them: effective and disciplined management teams. Having natural economic moats is effective only if a management team can use them effectively, and adept management teams can protect even smaller moats. 

Take a look at the integrated majors. Chevron and ExxonMobil aren't the only ones that occupy this space, yet they're the only two that have been able to string together more than 25 years of disciplined capital allocation and well-managed balance sheets that have allowed them to raise dividends in each of those years.

Helmerich & Payne is very much the same in this regard. Even though the company has been working through a large turnover of its fleet to newer, higher-specification rigs that can handle modern drilling needs, it has been able to maintain a strong balance sheet with more cash on hand than total debt, and its expansion plans have lived within its operational cash flows every year since the financial crisis. 

Up until 2014, Helmerich & Payne had one of the founding family members as its CEO, and the Helmerich family still holds the chairman of the board position. The current CEO, John Lindsay, has been with the company for close to 30 years now and has been part of the senior leadership for a decade. While this may not carry a whole lot of weight on Wall Street, longer-term investors should find comfort in knowing that the people heading the ship have a long tenure with the company and have seen it through multiple industry cycles.

Can it stay a dividend aristocrat with oil at $30 a barrel?
As good as Helmerich & Payne has been at handling market cycles in the past, this most recent one has been one of the worst we've seen in a long time. This also means that even some of the most stable companies out there could be at risk of seeing their dividends cut. Both ExxonMobil and Chevron have resorted to covering capital expenditures and dividend payments by issuing debt and selling off assets

Helmerich & Payne is in that precarious position of being beholden to producers' spending levels, which are expected to decline again in 2016. To make things worse, the company's fleet of rigs is highly concentrated in North America, and the number of active rigs in the U.S. has declined at a pace much faster than the rest of the world. 

US Rotary Rigs Chart

US Rotary Rigs data by YCharts

The one thing Helmerich & Payne does have going in its favor in regard to its dividend, though, is that its dividend obligations aren't that immense. Over the past 12 months, the company's $298 million in dividend payments was 20% of the operational cash that came in the door, and its operational cash was only $15 million short of covering all capital expenditures and dividend payments. With over $700 million in cash on hand and the possibility to issue debt if it came down to it, there's still a bit of wiggle room before Helmerich & Payne needs to make any drastic moves with the dividend to preserve its current operations.

What a Fool believes
Despite not having the natural barriers to preserve a dividend such as ExxonMobil and Chevron, Helmerich & Payne has used smart capital allocation and a conservative approach to growth that has allowed it to weather multiple down cycles in the oil and gas industry while maintaining a dividend aristocrat status. This recent downturn carries the risk of tarnishing the company's track record, but investors looking to keep an active energy portfolio should flock to quality management teams such as Helmerich & Payne if they have an eye on the long term.

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Stocks Mentioned

Helmerich & Payne, Inc. Stock Quote
Helmerich & Payne, Inc.
$49.73 (4.26%) $2.03
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$96.30 (2.01%) $1.90
Chevron Corporation Stock Quote
Chevron Corporation
$175.41 (1.60%) $2.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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