Rig Fans Are Embracing the Other HP

Investors gush about Helmerich & Payne despite a dip.
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To some, Helmerich & Payne (HP) - Get Report is starting to look like a luxury-model company with a budget-line price.

H&P, established 86 years ago and still led by the Helmerich family, boasts the "Rolls Royce" of drilling rigs and enjoys a stellar reputation throughout the energy industry. The company's high-end FlexRigs work better -- and, in turn, cost more -- than other rigs in the field. But frenzied oil and gas producers, chasing high-priced commodities, have become more and more willing to pay for that enhanced performance.

Indeed, H&P cannot seem to build its rigs fast enough to satisfy customer demand. In the U.S., the company now operates more than 100 land-based rigs -- with recent orders set to increase that fleet by nearly 75%. The company runs drilling rigs in offshore areas and, increasingly, international markets as well.

These days, those who like H&P's product offerings -- but hate standing in line -- might want to focus on the company's stock instead. The shares nearly doubled last year. Crushed in recent months by falling commodity prices, however, they now sell for just over half the price they fetched a few months ago.

Robert Howard, author of the

Positive Patterns

investment newsletter, sees a fancy bargain for his clients.

"We've owned this thing before," says Howard, who personally takes no position in the stocks that he follows. "Just look at the chart. After a huge rally, the stock will correct 50% and then go up again. ... I'm putting this on my 'recommend list' " right now."

The stock, which peaked at $40.24 in mid-May, rose 27 cents to $22.75 on Tuesday. The shares currently trade within $1.50 of their 52-week low.

History Lesson

If history, in fact, repeats itself, the sequels -- at H&P, at least -- tend to get better.

"I read somewhere that the company has never reported an annual loss," Howard marvels. "The great thing about these guys is that they have made money even when everybody else was getting killed. They're consummate professionals."

The latest installment in H&P's saga has proven especially rewarding for the company. H&P has long maintained a pristine balance sheet that allows the company to pursue technological advances when competitors -- hit by cyclical busts -- have struggled to get by. H&P's biggest break-through, the FlexRig, hit the market in 1997 and has given the company an important advantage since.

Based on H&P presentations, current FlexRigs operate 53% faster -- with far better safety records than traditional rigs. They command premium prices as a result. Exploration and production companies pay $26,500 a day for use of a FlexRig, when they could pay $19,500 a day for a typical rig instead. Still, H&P insists, those companies come out far ahead in the end.

Williams

(WMB) - Get Report

, the company's Tulsa, Okla., neighbor, sure thinks so. In a record-breaking deal announced last year, Williams ordered 10 new FlexRigs under a long-term contract that should generate more than $200 million in revenue for H&P.

Business has only picked up since then. At the beginning of this year, H&P announced plans to build 54 new rigs in order to satisfy orders from more than a dozen E&P companies.

"This is unprecedented in the history of Helmerich & Payne," Fredric E. Russell, a local money manager, told the

Tulsa World

at the time. "Nothing has come close to this."

Russell owns stock in H&P and has been thinking about buying more. He, like many, expresses faith in the company's management team.

"I don't worry about them," Russell told

TheStreet.com

this week. "They know what they're doing -- and they're not in love with themselves, either."

Fan Club

By now, H&P boasts a strong fan base.

Most analysts who follow H&P recommend buying the stock. They felt especially upbeat after reviewing the company's latest results.

Notably, analysts pointed out, H&P topped Wall Street estimates for the third quarter and saw utilization for its land rigs hit 100% during the period.

"The FlexRigs have given H&P the most modern, efficient land rig fleet in the world," Aperion analyst Lewis Kreps gushed in late July. Moreover, the "FlexRigs have higher utilization and higher dayrates throughout market cycles -- yielding H&P tremendous benefits."

Kreps has a buy recommendation and a $60 price target on H&P. His firm may seek to do business with the company over the course of the next three months.

Cautious Tone

To be fair, most analysts -- Kreps included -- see risks inherent in the stock. Rig operators remain vulnerable to negative swings in commodity prices. Their customers could choose to scale back their rich E&P budgets if energy prices continue to decline.

Harry Chernoff, a principal at Pathfinder Capital Advisors, recommends that investors exercise some caution right now.

Chernoff believes that the North American drilling sector could face another hit. He points out that natural gas inventories remain high and could reach maximum levels if winter weather, as predicted, starts off relatively mild. He worries about the demand for new drilling rigs, which keep rising in number, with natural gas in ample supply.

"That said, H&P -- with its FlexRig -- is among the better drillers in the group and is now among the better long-term values," Chernoff told

TheStreet.com

this week. "Short-term, however, it's too early to get back in."

Chernoff currently owns none of the stock himself.

During its latest conference call, the company referred to soft gas prices as "kind of the elephant in the room" but stopped well short of predicting of where those prices might go. Instead, the company offered some reassurance that it will continue to perform well regardless of what happens.

"All of us have heard stories about operators forced to scramble in order to find an old rig they can drag to the starting line in some cases just in order to save a lease," CEO Hans Helmerich stated in the company's third-quarter conference call. "If lower gas prices do in fact moderate the uptrend, customers will use the opportunity to high-grade their contractors and rig assets.

"In short, they will become more choosy," Helmerich said. "We believe we're in a strong position when the customer can choose based on drilling efficiency, safety, reliability and lowest overall costs -- versus simple rig availability."