HELMERICH & PAYNE, THE PREMIER U.S. LAND DRILLER for oil and gas, has been striking it rich. Its shares have doubled in the six months since we penned a bullish appraisal ("High-Tech Pay Dirt," Jan. 28). They shot to a 52-week high of $77 before settling at recent levels of about $69.
AP Photo/R.J. Sangosti Demand is strong for sophisticated rigs. It's not hard to see why. Demand for the contract driller's technologically advanced FlexRigs, which enable the extraction of gas and oil from areas that would otherwise be considered impenetrable, has been notably robust.
As natural gas prices have moved up to $13 per million British thermal units from $7.50 in late January, more development has picked up in unconventional fields such as the Barnett Shale in the Fort Worth area, the Haynesville Shale in East Texas and Louisiana, and the Marcellus Shale that runs from upstate New York through Pennsylvania to Ohio and West Virginia. That adds up to steady demand for rigs that can drill horizontally, as FlexRigs do.
Just last week, Chesapeake Energy told investors it expected to quintuple the number of rigs it deploys in the Haynesville Shale, to 60 by 2010.
In the course of its last three earnings calls, Helmerich & Payne (ticker: HP) has announced orders to build 20 new rigs. Helmerich's rig utilization rate is at 94%, and its rigs command a premium rate of $24,415 a day on average.
Helmerich's margins are at peak levels, revenues are at peak levels and cash flow is at peak levels.
Despite the momentum in the industry, it might be a good time to take some profits. Where the shares once traded at nine times 2008 earnings, they now trade closer to 17 times. On future results, the shares trade at 14 times 2009 consensus estimates of about $5 a share and 12 times 2010 estimates of $6 a share.
Matt Lamphier, an analyst at Arnhold and S. Bleichroeder's First Eagle Funds, says his firm has lightened its position in the stock because of the run-up in valuation. The company is "very well-positioned," says Lamphier, but "we're value investors" and the stock is "fully valued." While the stock might still have legs, there's now less of a "margin of safety," he says.
He cautions that the industry is extremely cyclical and volatile, as well as capital intensive, and while Helmerich's margins are at 35% today, four years ago they were at just 6.4%.