Helmerich & Payne [NYSE:HP] Dec. 18 closing price: $20.35
52-week range: $17.01 (Dec. 5, 2008) - $77.24 (Jun. 24, 2008)
Yield = $0.045 quarterly = 0.884% current yield
HP provides contract drilling services in the US, Argentina, Columbia, Ecuador and Venezuela. They own and operate 156 U.S. land rigs, 9 U.S. platform rigs, and 27 international rigs. This conservatively managed company has shown operating earnings through previous good and bad oil price cycles over the decades. They maintain a very solid balance sheet with ample cash and marketable securities. The well-covered dividend represents just a 4.2% payout ratio. Company executives draw very reasonable pay packages unlike many industry peers.
Helmerich’s earnings tend to move in tandem with oil prices and have risen substantially since bottoming in FY 2003. (FYs end in September). Here are the (split adjusted) per share numbers from the past six complete years as reported by Value Line:
…………….......................……………………………………….……. Avg.
FY …...… Sales ….. C/F …... EPS …… B/V …..... Div…....... P/BV
2003 ….. 5.14 ….. 1.00 …. 0.18 …… 9.15 …... 0.16 ....… 1.53x
2004 ….. 6.19 ….. 1.30 …. 0.36 …… 9.12 …... 0.16 ….... 1.59x
2005 ….. 7.70 ….. 1.94 …. 1.02 ……10.38 ….. 0.17 ....… 2.31x
2006 …..11.79 …. 3.81 …. 2.77 ……13.30 ….. 0.17 ….... 2.26x
2007 …..15.74 …. 5.17 …. 3.50 ……17.54 .…. 0.18 ....… 2.00x
2008 …..18.53 …. 5.35 …. 4.23 ……20.88 ….. 0.18 ....… 2.39x
I have noted the average annual price/book value as opposed to the average P/E because of the earnings volatility related to oil pricing.
At today’s quote of $20.35 the shares trade at just 0.97x book value - their lowest valuation by that measure since oil last bottomed in 1998 – 2000. The current P/E is just 4.8x actual trailing earnings of $4.23 and 5.1x projected FY 2009 EPS of $4.04 which assume oil prices stay well under year ago levels.
Except for the past few weeks HP shares had not traded below $21.30 since the middle of 2005 – a year when FY EPS came in at $1.02 versus last FY’s $4.23. These shares are only cheap now because oil has fallen to under $36 as I’m writing. If you feel we’ll see higher oil prices in the future this looks like a good way to play the future price rebound.
If HP shares return to even their lowest average price/book value [1.53x] from the years 2003 – 2008… they would hit about $38 based on expected year-end book value of near $25. That would only be a P/E of 9.4x on the consensus view. Value Line is using a 12 multiple for their 3 – 5 year target projections on this company.
Is it reasonable to think Helmerich & Payne shares could hit $38 in a year? They peaked at $32.80 in 2005 on one quarter of the current EPS and at $40.20, $46.30 and $77.20 during calendar years 2006, 2007 and 2008 respectively. Unless you see oil prices in a dramatic and sustainable decline these shares stand out for future stock performance.
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If you’re option savvy and want a medium-term play that takes a lot of risk out you might want to consider this 13 month combination trade:
…………………………………….................….. Cash Outlay ……….Cash Inflow
Buy 1000 HP @ $20.35 ……......……..……. $20,350
Sell 10 Jan. 2010 $25 Calls @ $4.40 …………………......…..…….. $4,400
Sell 10 Jan. 2010 $25 Puts @ $8.90 …………………….....……….. $8,900
Net Cash Out-of-Pocket ……………........…… $7,050
At expiration date (Jan. 15, 2010) if the shares are above $25 or up 23% from our starting price:
Your shares will be called (sold) for $25,000.
Your $25 puts will expire worthless (a good thing for you as a seller).
You will own no shares.
You will have no further option obligations.
You will have $25,000 for your $7,050 net out-of-pocket investment.
What’s the risk here?
If HP shares are < $25 on expiration date you will be forced to buy an additional 1000 shares. Your net cost on those shares would be:
The $25 strike price less the $8.90 per share put premium = $16.10 /share.
Your break even on the originally purchased shares would be:
$20.35 less the $4.40 call premium = $15.95 /share.
Thus in a worst case scenario you would end up owning 2000 shares at an average cost basis of $16.03 or 21.2% below the starting price of $20.38.
At $16.04 these shares would be only 77% of book value and 3.8x trailing earnings. Both those metrics are screamingly cheap based on all recorded history for HP shares.
Summary:
If HP rebounds by 23% or more in the next 13 months you will make better than a 253% cash-on-cash return (not including dividends).
If HP shares fall by less than 21% you will still be profitable.
This represents a very good risk / reward from my perspective.
Disclosure: Author owns shares and is short puts on HP.
52-week range: $17.01 (Dec. 5, 2008) - $77.24 (Jun. 24, 2008)
Yield = $0.045 quarterly = 0.884% current yield
HP provides contract drilling services in the US, Argentina, Columbia, Ecuador and Venezuela. They own and operate 156 U.S. land rigs, 9 U.S. platform rigs, and 27 international rigs. This conservatively managed company has shown operating earnings through previous good and bad oil price cycles over the decades. They maintain a very solid balance sheet with ample cash and marketable securities. The well-covered dividend represents just a 4.2% payout ratio. Company executives draw very reasonable pay packages unlike many industry peers.
Helmerich’s earnings tend to move in tandem with oil prices and have risen substantially since bottoming in FY 2003. (FYs end in September). Here are the (split adjusted) per share numbers from the past six complete years as reported by Value Line:
…………….......................……………………………………….……. Avg.
FY …...… Sales ….. C/F …... EPS …… B/V …..... Div…....... P/BV
2003 ….. 5.14 ….. 1.00 …. 0.18 …… 9.15 …... 0.16 ....… 1.53x
2004 ….. 6.19 ….. 1.30 …. 0.36 …… 9.12 …... 0.16 ….... 1.59x
2005 ….. 7.70 ….. 1.94 …. 1.02 ……10.38 ….. 0.17 ....… 2.31x
2006 …..11.79 …. 3.81 …. 2.77 ……13.30 ….. 0.17 ….... 2.26x
2007 …..15.74 …. 5.17 …. 3.50 ……17.54 .…. 0.18 ....… 2.00x
2008 …..18.53 …. 5.35 …. 4.23 ……20.88 ….. 0.18 ....… 2.39x
I have noted the average annual price/book value as opposed to the average P/E because of the earnings volatility related to oil pricing.
At today’s quote of $20.35 the shares trade at just 0.97x book value - their lowest valuation by that measure since oil last bottomed in 1998 – 2000. The current P/E is just 4.8x actual trailing earnings of $4.23 and 5.1x projected FY 2009 EPS of $4.04 which assume oil prices stay well under year ago levels.
Except for the past few weeks HP shares had not traded below $21.30 since the middle of 2005 – a year when FY EPS came in at $1.02 versus last FY’s $4.23. These shares are only cheap now because oil has fallen to under $36 as I’m writing. If you feel we’ll see higher oil prices in the future this looks like a good way to play the future price rebound.
If HP shares return to even their lowest average price/book value [1.53x] from the years 2003 – 2008… they would hit about $38 based on expected year-end book value of near $25. That would only be a P/E of 9.4x on the consensus view. Value Line is using a 12 multiple for their 3 – 5 year target projections on this company.
Is it reasonable to think Helmerich & Payne shares could hit $38 in a year? They peaked at $32.80 in 2005 on one quarter of the current EPS and at $40.20, $46.30 and $77.20 during calendar years 2006, 2007 and 2008 respectively. Unless you see oil prices in a dramatic and sustainable decline these shares stand out for future stock performance.
*********************************************************************************
If you’re option savvy and want a medium-term play that takes a lot of risk out you might want to consider this 13 month combination trade:
…………………………………….................….. Cash Outlay ……….Cash Inflow
Buy 1000 HP @ $20.35 ……......……..……. $20,350
Sell 10 Jan. 2010 $25 Calls @ $4.40 …………………......…..…….. $4,400
Sell 10 Jan. 2010 $25 Puts @ $8.90 …………………….....……….. $8,900
Net Cash Out-of-Pocket ……………........…… $7,050
At expiration date (Jan. 15, 2010) if the shares are above $25 or up 23% from our starting price:
Your shares will be called (sold) for $25,000.
Your $25 puts will expire worthless (a good thing for you as a seller).
You will own no shares.
You will have no further option obligations.
You will have $25,000 for your $7,050 net out-of-pocket investment.
What’s the risk here?
If HP shares are < $25 on expiration date you will be forced to buy an additional 1000 shares. Your net cost on those shares would be:
The $25 strike price less the $8.90 per share put premium = $16.10 /share.
Your break even on the originally purchased shares would be:
$20.35 less the $4.40 call premium = $15.95 /share.
Thus in a worst case scenario you would end up owning 2000 shares at an average cost basis of $16.03 or 21.2% below the starting price of $20.38.
At $16.04 these shares would be only 77% of book value and 3.8x trailing earnings. Both those metrics are screamingly cheap based on all recorded history for HP shares.
Summary:
If HP rebounds by 23% or more in the next 13 months you will make better than a 253% cash-on-cash return (not including dividends).
If HP shares fall by less than 21% you will still be profitable.
This represents a very good risk / reward from my perspective.
Disclosure: Author owns shares and is short puts on HP.
