1 Drilling Stock That Is On Sale

Back in the day, HP was known as Hewlett Packard but these days the same ticker symbol is associated with a drilling, exploration and production company called Helmerich & Payne (NYSE:HP).

If you haven’t heard from it, you’re not alone but it did register on the portfolio of Adams Wealth Advisors, an investment manager in Utah, who ranks it among their most undervalued holdings.

The more you look under the hood at HP, the more there is to like. To begin with, earnings per share have been rising nicely in recent quarters from -$0.73 per share twelve quarters ago to $0.78 per share in the most recent quarter.

Perhaps it’s not entirely a surprise to see earnings pop given that quarterly revenues have been notably on the rise from $246.2 million to $659.6 million over that same duration.

And indeed operating income has swung from the red to the black too, up from negative $91.8 million to plus $110.1 million.

Perhaps those positive results are the reason management has been so upbeat, and followed through with a share repurchase scheme that still has 1.3 million shares to be bought back.

So, should retail investors follow the lead of management?

Is HP Stock Undervalued?

According to 29 analysts, HP stock is undervalued by 29.2% with the consensus fair value sitting at $46.37 per share.

That bullish thesis is supported by a discounted cash flow forecast, or DCF, analysis which puts a price target of $52 per share on Helmerich & Payne.

Even the company’s relatively low P/E ratio of 8.2x suggests that the energy company is trading a modest valuation.

Other key metrics tend to confirm the valuation thesis. For example, the price-to-book ratio is just 1.3x and relative to the last twelve months of sales, the premium is just 1.2x.

For a company generating $3.6 billion in revenues and reporting gross profit of $1.1 billion, the financials look very appealing at this time.

But is it worth dipping your toe in and owning some?

Is HP Stock a Buy?

For income-oriented investors, Helmerich & Payne makes a compelling case for a purchase by offering a dividend yield of 5.1%, translating to an annualized payout of $1.64 per share.

The payout ratio of just 46.2% suggests that the dividend is more than safe at this time and that’s further confirmed by a look at the cash flows, which are more than enough to cover the interest payments on debt and the shareholder dividend.

For the past six quarters, levered free cash flows have been reported in the black and the most recent quarter resulted in a $101 million FCF figure.

There should be no surprises this year, either, to the dividend with analysts forecasting that the streak of profitability over the past 12 months will continue over the coming ones too.

A further boost to investors is the statistic that HP has managed to pay dividends for 54 consecutive quarters, an impressive feat for a firm that operates in a notoriously volatile space.

Why HP Could Surprise To The Upside?

Helmerich & Payne isn’t your ordinary driller, but instead has invested significantly in advanced drilling technologies, especially in automated drilling rigs. These investments have resulted in lower operational costs and higher efficiencies in oil and gas extraction, which in turn have produced a competitive advantage and higher profit margins.

So too has the firm developed a somewhat unique approach to contract structures, often opting for shorter-term contracts with higher day rates. This strategy has led to greater flexibility in pricing adjustments as market conditions change, thereby contributing to higher revenues during periods of increased demand.

It has also built a strong reputation for safety and efficiency, which is a significant driver in securing new contracts and retaining existing clients. The domino effect of higher client retention is then more stable and predictable revenue streams.

The firm’s success domestically has led to international expansion with growing its operations beyond the U.S. to regions with growing energy demands. As such, it has reduced its dependence on a single market and established new clients and contract opportunities to further boost revenue streams 

Time to Drill for Oil?

Helmerich & Payne has clearly developed a competitive edge that is evident in its high return on invested capital of 11.7% and impressive return on common equity of 15.5%.

With $545 million in debt offsetting around $350 million in liquid reserves, the balance sheet is strong too.

Indeed a look at the profit-and-loss statement, balance sheet, and cash flow statement, all reveal this is a company firing on all cylinders, except for one, the lagging share price.

It’s there that investors can derive some solace that both a cash flows analysis and Wall Street sees a lot of opportunity for the share price to close in on a fair value.

And for income-seeking investors who want to get paid in the meantime, the 5.1% dividend yield that has a long streak of consecutive payments and the low payout ratio can likely be trusted.

All in all, Helmerich & Payne appears to be a well-functioning driller that is flying under a lot of radars right now but has material upside potential.

Having fallen 24% over the past year, a severe underperformance relative to the 24.7% gain of the S&P 500, the tide should be turning and so too the heads of value investors towards an energy stock that appears to be on sale.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.