Tuesday, February 3, 2015

Stock Analysis: Helmerich & Payne, Inc. (NYSE: HP)

Helmerich & Payne, Inc. is the holding company for Helmerich & Payne International
Drilling Company, an international drilling contractor with land and offshore operations in the United
States, Ecuador, Colombia, Argentina, Tunisia, Bahrain and United Arab Emirates. It specializes in deep
drilling in major gas producing basins of the U.S., and in drilling for oil and gas in remote international areas.
Contract drilling operations comprise nearly all of the company's revenue base (99.6% of FY 14 (Sep.)
revenues). The remaining 0.4% of FY 14 revenues was derived mainly from real estate operations. HP generated about 56% of FY 14 consolidated revenues from its 10 largest customers, including BHP Billiton, Devon Energy Production Co. LP and Occidental Oil and Gas Corporation.

The company's contract drilling operations are principally comprised of three operating segments -- the
U.S. Land segment (84% of total FY 14 operating revenues, 91% of FY 14 segment operating income), the Offshore segment (6.8%, 6.2%), and the International Land segment (9.6%, 3.2%).

Purchase Criteria Check List

  • HP is one of dividend champions with 42 years of dividend payment increase.  
  • It has S&P Capital IQ rating at B+, and Morningstar.com gives it 4-star rating. 
  • Dividend yield is above 5%, and payout ratio is below 40%.  
  • 10-year EPS average is around $4.00.  HP's EPS trend looks sound and healthy.
  • Debt to equity rate is only 1%, which leaves large room for HP to maneuver.
However, after re-consideration, I put a question mark on its 10-year dividend growth rate.  HP's 10-year average DGR is at 32.04%, which is outstanding as far as this percentage is concerned.  But I got worried when I dug through the data further.

Please see below dividend history chart.  HP's dividends only took off since year 2013.  Before 2013, its annual dividend growth rate is merely at 3%.  In 2013, its dividend increased from $0.28 to $0.87 annually, about 211% increase.  Again in 2014, its dividend increased to $2.44, which is 180% increase.  Accordingly, HP's payout ratio shot up from 5.3% (2012), to 13.1% (2013), and to 37.7% (2014).  Considering the highly cyclical character of oil&gas drilling industry, I really doubt this company will sustain the high dividend growth, especially for current period when oil industry is in deep turbulence. In this article, the author argued that, "I believe the company will be able to sustain its 42 year history of raising dividends, but this stock remains a speculation play as long as oil is under $50 per barrel."  I agree with him to a high degree.

Now let's look at HP's EPS, dividend, and FCF history in last 10 years.  I like the performance of EPS.  Looks terrific year over year.  But the FCF performance isn't so decent.  FCF is far below EPS, and most of the time FCF is even below dividend payment.  With its super low debt to equity ratio, I believe that it's easy for HP to acquire borrowed fund though.  So the FCF might not be a red light to purchase this stock.

Disclosure: None. Will buy some shares if HP share price drop to lower $50s.

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