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January 25, 2018, by Liam Denning
(Bloomberg Gadfly)
If you want to be big in shale these days, you need to say one thing: “Super-spec me.” And Helmerich & Payne Inc. is who can do that for you.
H&P, which beat earnings forecasts for its fiscal first-quarter results out Thursday, runs America’s biggest fleet of so-called “super-spec” onshore drilling rigs. These offer more power and can drill longer horizontal wells. They can also move quickly from well to well to speed things up, either pulled along on skids or even walking themselves on hydraulic “feet” like prototype Transformers. In short, they are perfect for the current phase of shale development, which, after the crash in oil prices, prizes longer wells and minimal downtime between them:
H&P owns about 40 percent of active super-spec rigs. Having the rigs that the exploration and production industry needs means you can charge more. That came through in Thursday’s results, where higher prices and utilization helped push margin per U.S. onshore rig up 10 percent versus the prior quarter, continuing a positive trend since the trough in early 2017. While costs per rig are expected to rise by 3 percent in the current quarter, a slight increase in revenue per rig and utilization should keep margins relatively flat.
H&P also raised its capital expenditure budget for 2018 to $350 million, up from a range of $250 to $300 million. Assuming $100 million of that is for maintenance, that looks more than enough for continued upgrades of rigs to super-spec grade.
This is H&P’s real competitive edge. The company estimates it owns about half of the 200-250 rigs that can be upgraded relatively easily to super-spec grade (a figure that comports with analysts estimates). Upgrading a rig costs anywhere from about $2 million to $8 million, depending on whether it runs on skids or walks; building one from scratch won’t leave you much change out of $25 million.
H&P upgraded 16 in the latest quarter and says it can do 12 or more in each coming quarter if conditions warrant it. Assuming 90 percent utilization and that a super-spec rig can charge an extra $2,000-$3,000 per day, that investment pays back in about two to four years. The other way to think about this is that, if the demand is there, then H&P has the flexibility to take market share quickly from its rivals, and with less money paid out to do so.
That matters all the more because, like many others in the oil business, H&P has been burning cash for several quarters. While it has broadly covered capital expenditure from its operating cash flow, it has effectively had to borrow to pay its dividend.
There was a brief scare last year about H&P having to cut its dividend (which it has held flat since early 2016). However, with pricing and activity picking up and oil around $70 a barrel, H&P has moved on. While minimal, the company reported its first positive Ebit last quarter for the first time since late 2015. And net debt is less than 0.2 times trailing Ebitda.
The dividend itself, while flat, offers a reasonable return on holding H&P as its recovery continues. The stock now yields 3.9 percent, which is a decent premium to the broader market:
With the E&P industry caught between the impulse to drill and the need for efficiency, H&P is in shale’s sweet spot.
— Updated with additional details throughout.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal’s “Heard on the Street” column. Before that, he wrote for the Financial Times’ Lex column. He has also worked as an investment banker and consultant.
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