We scour the net for great ideas, so you don't have to
Claim this username to collect earnings from this post, and the portfolio!
HP is a performance-driven drilling solutions and technologies company based in Tulsa, Oklahoma with operations in all major U.S. onshore oil and gas producing basins as well as South America and the Middle East. They operate under four reporting segments, North America Solutions (Largest segment), Offshore Gulf of Mexico, International Solutions (South America & UAE) and Other. (Small real estate holdings) The current market price is a significant discount to intrinsic value considering the company’s strategic alignment with technology through performance contracts, ability to innovate in an industry slow to adopt, fortified balance sheet, and history of conservative management by a dynamic team. Risks to this company are largely overstated and based on the claim that oil and gas will soon be replaced by green initiatives. The world is slowly trending toward renewable energy, yet it will be many decades before this has a material impact on oil demand. The nature of this companies’ business is very volatile since it is largely dependent on oil prices. This would be worrisome if the company were not conservatively managed. I believe that the company will be worth significantly more in the future as rig activity levels continue to increase due to the price of oil remaining relatively stable. H&P will continue to increase in value as E&Ps are slowly starting to increase CapEx budgets.
Alignment of Automation Technology with Performance Contracts
Traditionally HP (and the industry as a whole) has used the day rate model. This model charges a fixed rate per rig per day for the duration of the drilling contract. The new performance-based contracts (first talked about in the Q418 earnings call and implemented in the subsequent Q) charge a base rate and specify bonus payments if key performance indicators are met. Key performance indicators are metrics pertaining to qualitative as well as quantitative drilling factors. These factors are specified when the contract is signed and can vary depending on the customers goals. As of Q2 2021 30% of all US Land contracted rigs were under some type of performance agreement. This number is up from only 10% in Q2 2020. Historically, this industry is slow to embrace change, as seen with the initial roll out of the first Super Spec rigs and Flex 3 Legacy rigs before that. However, customers will continue to increasingly prefer H&P performance contracts because of the value added. This increased adoption is margin accretive for H&P because of the company’s investments in automation technology such as Motive, MagVar, and most importantly, AutoSlide. AutoSlide replaces the directional driller at rig side and lands the bit in the zone faster and more efficient than a human ever could. As previously stated, the industry is slow to adopt change, yet AutoSlide has seen continuously increased adoption since it was first introduced to beta testing in Q4 2018. AutoSlide is now found on 25% of all active H&P rigs. The alignment of auto tech and the "pay for what you get" business model is value added for customers and shareholders alike.
Titan of a Balance Sheet Built by a Conservative Management Team
The company has been managed conservatively since it was founded and remains so today. It sports a best-in-class debt to capital of 12.2%. It recently ended Q3 2021 with $553mn in cash and STI. (While only having long term debt of $481mn) It also has a revolving credit facility of $750mn which is undrawn.
This brings total liquidity to $1.3bn. On March 31, 2020, it cut dividends to $0.25 per share from $0.71 per share to remain agile in the COVID oil crisis environment. As rig activity continues to increase (rig count up 10% in Q3 over Q2) I think the board may consider raising the dividend back to pre-covid levels.
The current CEO, John Lindsey, has been at the head since 2014 and has been a career employee since 1987. During the Covid oil demand crisis, the management team quickly cut costs and restructured to maintain agility. As such, the business has continued to generate considerable operating cashflow, a trend that I believe will eventually return to pre covid averages of roughly half a billion dollars annually.
Shares were up about 10% on friday due to the expectation of a supply imbalance from hurricane ida causing the price of oil to increase. This is just temporary noise. The real value is in the long term recovery.
Please share your thoughts and opinions in the comments. This is my first official post on this subreddit and first public DD. Tell me what I can do better next time. Cheers.
This is not financial advice. Do your own research. This report is in no way exhaustive of the drilling climate or of H&Ps condition as a company. I currently have around 10% of my portfolio long HP.