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Ron Baron on Helmerich & Payne (HP)

April 25, 2006 | About:

Helmerich & Payne (''H&P'') is the fifth largest land driller in the United States with smaller operations in the domestic offshore and international land rig markets. The domestic land drilling industry has grown meaningfully during the past two years as exploration and production companies have increased spending to take advantage of record oil and natural gas prices. During the last trough for this industry in 2002, the domestic land rig count and average day rate bottomed at 613 rigs and about $6,600. Today, these metrics have climbed to 1,463 rigs and about $15,000, respectively. An investment in any land drilling company at this stage of the energy cycle requires a belief that the drilling boom will continue, a thesis with which we generally agree. However, much of our enthusiasm relates to H&P's forward-looking management, which we believe has positioned the company for solid earnings growth over the next several years in almost any commodity environment.

H&P was founded in 1920 by the grandfather of the current CEO, Hans Helmerich, and for many years the company successfully operated as a relatively small drilling contractor. In 1997, the company made a strategic decision to expand its fleet with a new generation of ''FlexRigs'' that were more mobile and more flexible in terms of well depth than their predecessors. H&P designed and assembled these rigs inhouse, solidifying its position as a pioneer in this area. Today, the company has reaped the rewards of its FlexRig program. We believe H&P's fleet of 90 land rigs is the most modern and technologically advanced fleet in the United States. Despite the cyclicality inherent in the land rig market, H&P's FlexRigs are in high demand and earn a premium of 25% or more relative to conventional rigs. Their use of modern equipment and quicker well-to-well movement allows customers to reduce the number of days to drill a well. As a result, total well costs are lower despite higher rig day rates, and more wells can be drilled in a given period by a FlexRig than with a conventional rig. H&P began an expansion program last year that the company expects will add 59 more FlexRigs over the next two years, increasing its domestic land fleet size by almost two-thirds. Some observers are concerned about the new order book for the overall land rig industry, which is seeing its first big building program in 25 years. But, we believe that H&P is mitigating this risk by building only rigs with long-term contracts attached to them. Each of its 59 new FlexRigs already has a firm contract with at least a three-year term. Management believes that this $700 million expansion program will have a three-year payback and a rate of return better than 20%. (Geoff Jones)

Rating: 1.0/5 (1 vote)

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