Helmerich & Payne's Management Couldn't Be More Excited for America's Oil Industry in 2017

By Tyler Crowe Markets Fool.com

As oil and gas companies start to report their earnings for the final quarter and give guidance for the coming year, there is a lot of optimism for increased oil and gas drilling in the United States. For Helmerich & Payne (NYSE: HP), this is clearly good news. Based on what management said this past quarter, though, there is even more reason for investors to cheer as just about every market trend in the world of land drilling points to an advantage for the company. Here's a quick look at several quotes from Helmerich & Payne's most recent conference call that encapsulate what management sees as a huge advantage in the coming years.

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Image source: Getty Images.

Getting back to work, fast

In the company's most recent earnings presentation, the income statement numbers didn't show much of a recovery. If you look at the number of rigs going to work, however, there was a noticeable change. CEO John Lindsay put some staggering numbers behind all those rigs getting put back to work when he said:

Since the last earnings call on November 17 of '16, we have put 36 FlexRigs to work, which is the equivalent to delivering a FlexRig to active status every 47 hours. Of those rigs, 21 are in the spot market and 15 on term contract. Although spot pricing remains low, we are seeing some price improvements for high-quality, high-performing AC drive rigs. The Permian led the way with 12 rigs; 6 each in the Eagle Ford and SCOOP and STACK play; we had 3 in the Haynesville; 2 each in the Marcellus, Utica and Piceance Basins; and 1 apiece in the Niobrara, Woodvine and Texas Gulf Coast.

From a FlexRig model perspective, 23 out of the 36 were FlexRig3s, 2 were FlexRig4s and 11 were FlexRig5s. As we commented on the last call, we continue to have great demand for the FlexRig3. It is the workhorse of the fleet and delivers great value for the customer on single well and pad locations. Of these 36 rigs, approximately 2/3 were classified a super-spec. We have also added 11 new customers since the last call, and momentum has been building as a result of the performance our folks are delivering.

A rapid rise in rig utilization is a good thing in and of itself, but to see it happen with the company's high-specification rigs is even better. These are the rigs that generate the highest revenue and margin per rig day.

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Putting them to work in the right basins

Prior to the oil price downturn, investors were searching across the country for new shale basins that could be the next big thing. These new basins cost more, though. Today, with oil prices still in the $50 range, drilling activity has slowed significantly while producers figure out those particular basins. The real uptick in activity is coming in places like the Permian Basin. So, of course, Lindsay pointed out that Helmerich & Payne has many available rigs in these high-activity basins.

Our 2 most active basins today are the Permian and the SCOOP and STACK play. The Permian remains our most active operation, and we have 60 rigs contracted coming off a low of 38 contracted rigs. And at one point last summer, we only had about 23 operating rigs. We have 62 idle FlexRigs in the area, 42 of which are 1,500-horsepower, and we expect to continue to have opportunities to grow our active fleet in the Permian.In the SCOOP and STACK today, we have 27 rigs contracted coming off a low of 15 contracted rigs.

Still plenty more availability

Even after that rather remarkable increase in rigs going to work, Lindsay was also quick to point out that the company still has a lot of available rigs that can be deployed relatively quickly.

We estimate that H&P has about 56% of the available 1,500-horsepower AC rigs in U.S. land today, providing more capacity than any of our competitors in the market. We currently have 139 1,500-horsepower AC FlexRigs under contract and 187 idle and available to go to work in the U.S. We have 20% market share of the U.S. land horizontal and directional drilling market, with our closest competitor at 12%. We believe that our overall market share in U.S. land has expanded to approximately 18% from 16% over the past few months. And we've been able to grow our market share from 15% since the peak of activity in 2014.

Image source: Helmerich & Payne.

A unique strategic advantage

The thing about the drilling industry today is that technology is changing incredibly fast, and producers want that tech to improve well economics. Typically, rig companies need to build entirely new rigs to add these new specifications to rigs. According to Lindsay, Helmerich & Payne has designed its rigs so that they can be periodically upgraded, and many of its available rigs can be upgraded if desired.

Our FlexRig design allows H&P to invest in our existing fleet to enhance rig capabilities that will benefit our customers in the areas that require well designs which are more challenging and complex. H&P leads the industry with our fleet of AC drive super-spec rigs that have 7,500 psi circulating systems, multi-well pad capability, 1,500-horsepower drawworks rating and 750,000 pound hook load.

On our last call, we mentioned having approximately 80 of these rigs. And as of today, we have approximately 100 super-spec rigs in the fleet. The industry's capacity to provide additional super-spec rigs in a timely and cost-effective way appears to be limited today with the existing industry rig fleet, which positions H&P very well for future expansion in this space. Should there be significant market demand for super-spec rigs going forward, H&P has the capability of providing approximately 270 super-spec FlexRigs to the market without requiring any new builds, solely through upgrades where needed to our current FlexRig3 and FlexRig5 fleet.

This is a huge advantage over many of its peers. It means that Helmerich & Payne can meet the new demands of the market without having to take on the high capital costs of building new rigs. That should translate to great returns on invested capital over the next several years.

The final stages of the rig industry turnover

With that demand for higher specification rigs also comes the fact that many land rigs have become obsolete. When asked about an increased rate of rigs becoming obsolete, CFO Juan Pablo Tardio pointed out how this downturn is going to accelerate the retirement of these older rigs as there is little work for them left to do.

Yes, I think that's a great point. Go back to the peak in 2014 and there were over 1,800 rigs running, and about 900 or less, probably 850, at that time were AC drive rigs. And so that means the rest of the fleet was made up of legacy rigs, mechanical and SCR. And you can see today, I don't have it in front of me, but I think mechanical rigs are...16%. And SCR rigs are 18%. And AC drive rigs continue to capture market share. At the peak in '14, AC rigs made up 41% of the share. Today, AC rigs make up 66% and growing. And so yes, I think there's definitely an obsolescence factor. Those rigs are -- design-wise those rigs are 50 years old. A lot of those rigs were built in the '70s and '80s. And it's going to be really challenging for those rigs to keep up, particularly if you're looking to put a rig like that on these longer-lateral wells and drill the wells in the times that we're drilling them today with FlexRigs. They're just going to have a tough time competing.

Helmerich & Payne's U.S.-based fleet is almost entirely composed of AC drive rigs, so the fear that it will lose earnings power from fewer rigs is much lower than for its peers.

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Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.