This driller is ready to rock

Rig supplier and operator Helmerich & Payne is a promising play on the domestic drilling boom.

By MoneyShow.com Jan 25, 2012 2:54PM

Image: Oil drums (© Kevin Phillips/Digital Vision/age fotostock)By Igor Greenwald, MoneyShow.com


These are momentous times in the North American drilling industry.


On Monday, natural gas prices soared some 10% from a decade-low after key producer Chesapeake Energy (CHK) said it would cut its drilling of wells containing only natural gas by half, shifting resources to shale plays yielding the much more profitable crude and other liquids.


The cuts are far short of what would be needed to curb the epic glut threatening to overwhelm the nation's gas storage capacity later this year. Yet President Obama promoted natural gas drilling as the solution to America's energy and job deficits in Tuesday's State of the Union Address.


Meanwhile, U.S. crude output is already booming, thanks to advances in extracting oil from rocks with "fracking" and horizontal drilling. The Energy Information Administration expects oil output in the continental U.S. to jump 20% between 2010 and 2020, according to its latest upgraded estimate.


As with any resource boom, the real money here comes from selling shovels to the prospectors. In this case, the shovels are land rigs, and contract driller Helmerich & Payne (HP) is the leading supplier and operator of such rigs in the continental U.S.


Moreover, it makes the most technologically advanced rigs in the industry, ones better adapted to the technical difficulties of shale drilling. As a result, H&P can charge significantly higher day rates and enjoy fatter margins than rivals like Patterson-UTI (PTEN) and Nabors Industries (NBR), and still provide a better value proposition, thanks to its rigs' increased efficiency.


These advantages are manifest in the 25% revenue surge H&P delivered in November, as well as the 46% jump in profits. The company has more cash than debt, and is valued at an attractive 12 times estimated earnings for the current fiscal year, and less than seven times trailing cash flow.


Roughly three-quarters of its rigs are drilling for oil and natural gas liquids, as opposed to "dry" gas, so shifts such as the one announced yesterday by Chesapeake play to H&P's strengths. Revenue for its land-based rigs, a key demand metric, is forecast to rise 5% in the most recent quarter.


Goldman Sachs opined last month that "owing to the shale revolution, U.S. land rig demand has just entered the second phase of a multi-year pick-up."


Even if exploration and drilling stall, many of the outdated land rigs pressed into service during the first stage of the boom are due to be retired and replaced. Goldman thinks the long-overdue recovery in natural gas prices could spur demand even more a couple of years down the road.


HP is run by the grandson of a barnstorming pilot who founded the firm 92 years ago. The founder's son and longtime CEO, who passed away two weeks ago, was a revered civic leader in Tulsa, Oklahoma.


That death spurred profit-taking in the stock -- probably on worries about sales by insiders, who haven't been shy in the past about unloading at levels near the current one.


But this is an inexpensive stock with a dominant competitive position in a booming industry, stable and skilled leadership, and very bright prospects. The profit-taking seems to have run its course following yesterday’s intraday reversal. HP is headed higher.


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2Comments
Jan 25, 2012 4:53PM
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It is time for America to become an exporter of LNG to our Asian trading partners.  Japan is shifting from their nuclear power generation after the earth quake disaster last spring.  China wants to clean up their air quality by weaning themselves away from coal.  Alaska's north slope has over 20 trillion cubic feet of surplus proven reserves of natural gas.  The jobs to construct this pipeline would put a sizable dent in the construction industry unemployment.  Balance of trade deficit would be reduced as America exports a product, instead of being only an importer of products.   Iran's threatened hostage taking of middle East oil and LNG would be a moot point, as Asia has a "new" source of secured energy that would not pass through the Persian Gulf.  The list of no brainers goes on and on .. NOW HOW COME THIS NATURAL GAS PIPELINE ISN'T ALREADY BUILT?
Jan 25, 2012 6:41PM
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Newsflash THEBLAMEEE, there aren't any perfect energy sources yet known.  Does the fracking have risks?  Yes...  Does nuclear have risk?  Yes...  Oil pumping/shale?  Yes...  Wind turbines?  Yes...  Coal?  Yes....  Even solar has issues, 25yr life span, only 19% efficient and many places don't have enough sunshine to even consider it.  I wish Obama would have stated last night the need to have ALL GOV. (non military), vehicles running on NG by 2016!
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