2017 was a year in which Helmerich & Payne (NYSE: HP) sowed a lot of seeds to improve its business. The company spent a lot of money reactivating and upgrading its rigs to satisfy producers' incredible appetite for high-specification rigs (called super-spec rigs in industry parlance). That came at a cost, though, as the company sacrificed a lot on margins and cash flow to grow.
This year, though, Helmerich & Payne thinks it can reap what it sowed last year. As the market for rigs gets tighter and management can be more selective about its growth, the company thinks it can deliver higher margins and bring its bottom line back into the black. Here are a few quotes from Helmerich & Payne's most recent conference call that highlight what management has in mind for the rest of the year.
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The pillars for 2018 success
Helmerich's strategy in recent years has been to offer a unique product to the drilling community that no other rig company could. Its standardized rig designs and construction made upgrades incredibly easy, which allowed management to move faster than its peers to reactivate and upgrade rigs right when producers needed them over a year ago.
According to CEO John Lindsay, the company will maintain this approach. With producers now more flush with cash, Lindsay also thinks it will lead to better pricing power and returns.
Markets are tight if you are looking in the right place
According to the Baker Hughes, A GE Company rig count, there are 984 active rigs in the U.S. right now. Back in 2014, though, that number was north of 1,800. One would assume this means that there is a lot of excess idle equipment out there that would impact pricing power. That isn't necessarily the case, though. According to Lindsay, the kind of rigs producers want are in high demand. What's more, the company is likely in the best position to meet future demand.
When acquisitions make sense
Even though the market is improving, most rig companies are selling at incredibly low valuations. A company with a strong balance sheet like Helmerich & Payne could easily expand its fleet on the cheap if it wanted to.
According to Lindsay, Helmerich & Payne has no intention of buying rigs from other companies. Instead, he highlighted its acquisition strategy.
As mentioned above, there are a lot of inherent advantages to having a standardized rig design. It makes parts interchangeable, simplifies the supply chain, and makes per-unit costs for construction and upgrades lower than customized fleets. It's one of the many reasons that Helmerich & Payne is considered the best in the industry.
Better discipline in the industry?
When asked about the current oil market and what Helmerich & Payne expects in the year in terms of drilling activity and oil prices, Lindsay gave an interesting response.
The last sentence is what really stands out from an investment perspective. For years, an oil and gas producer's solution to everything was produce more oil. That got a lot of companies in trouble because they were outspending their cash flows and relying heavily on the debt and equity market to fill the funding gaps. That strategy can only go so long, though, as eventually investors will want to see some form of capital return. If Lindsay is indeed correct, and there are signs that some producers are doing this as we speak, then it could make for a much healthier and resilient U.S. oil market.
Any fear of losing those dividend payments?
Helmerich & Payne has been a dividend stock for more than four decades, but this recent downturn has tested the company's payout in ways we haven't seen before. While the company has hinted that the dividend could be revisited if things turned again for the worse, CFO Juan Pablo Tardio seems to think that the steps it took in 2017 will start to pay off in 2018.
If it truly is just a timing thing, then we should see a significant boost to cash flow in the coming quarters. That gives investors a good benchmark to measure Helmerich & Payne's success in 2018. If the company can deliver higher operational cash from its high-end fleet without costs eating into profits, then the concerns about its 4.25% dividend yield may be overblown and shares could be quite cheap.
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