Feature | SATURDAY, AUGUST 21, 2010
By SANDRA WARD | MORE ARTICLES BY AUTHOR

Helmerich & Payne makes the rigs explorers need to pull hard-to-extract, liquid-rich natural gas from shale. The potential could transform pricing in the industry.

RECENT DISCOVERIES OF VAST SHALE DEPOSITS in the U.S., and the mother lode of natural gas they hold, have the potential to strikingly transform domestic energy markets.

The rush to tap into these gas-rich formations is proving a bonanza for Tulsa, Okla.-based Helmerich & Payne, the dominant supplier of high-performance drilling rigs able to extract gas from the shale pockets.

Last month, Helmerich & Payne (ticker: HP) announced plans to build 16 high-performance rigs, many under multiyear contracts commanding day rates in the mid-$20,000s to service the most promising oil and gas shale basins in the U.S. The latest orders bring the company's total to 19 rigs for this fiscal year, ending Sept. 30.



Going Strong: The company has orders for 19 high-tech FlexRigs in its fiscal year ending next month. That's bolstering its operations and balance sheet.
.Remarkably, the strong order flow reveals a shift in industry dynamics within the normal energy cycle, coming as it does early in an economic recovery—when uncertainty is running high and when the price of natural gas remains low despite a hotter-than-usual summer. (For more on natural-gas prices, see Commodities Corner.)

As more and more exploration companies drill in these unconventional shale basins, which require more complicated methods of extraction, they are increasingly abandoning the fleet of available older rigs in favor of the new technologically advanced and cost-effective rigs. This has resulted in a shortage of the high-performing rigs and an oversupply of the older rigs, most of them sitting idle.

While the discovery of so many shale formations has significantly boosted natural-gas supplies, contributing to the pressure on prices, the shale basins are also rich in natural-gas liquids and condensates priced more in line with crude oil, which, at a recent $75 a barrel, currently sells at levels that are historically high relative to natural gas. Typically, oil trades from six to 12 times the price of a British thermal unit of gas, and is often afforded an extra premium because it's relatively easy to convert into gas. That would normally result in oil priced at about $25 to $51 a barrel, compared with the recent $75. This pricing shift has turned well operators' attention to these liquid-rich plays.

Helmerich & Payne


* Estimate Source: Thomson Reuters

.Helmerich & Payne sits at the forefront of this wave and is continuing to win market share as demand surges for its high-tech FlexRigs, introduced in 1998 and now in their fourth generation of development. Of the FlexRigs ordered so far this year, all will be put to use at wells considered challenging and where Helmerich & Payne already has a big presence. For instance, six of them will end up in the Eagle Ford Shale in South Texas, three in the Haynesville Shale in Northwest Louisiana and East Texas, three in the Woodford Shale in Oklahoma and two in the Bakken Shale, located in parts of Montana, North Dakota and the Canadian provinces of Saskatchewan and Manitoba. Since the first fiscal quarter of this year, Helmerich & Payne has tripled its exposure in the Marcellus Shale to 12 rigs and has doubled its presence in the Eagle Ford, Bakken and Permian basins.

In discussing industry trends following the release of his company's third-quarter results, Chief Executive Hans Helmerich noted that "future demand may disproportionately favor new builds," even if gas prices remain "rangebound, which is what we see as the most likely case." FlexRigs "will continue to experience better utilization and margins compared to the industry fleet, and [this] positions us well to satisfy our customers' future demand."

.Helmerich & Payne's third-quarter earnings came in at 61 cents a share, excluding an impairment charge for assets seized by the Venezuelan government. This beat expectations, as did its revenue of $484 million. It was the first time in nearly two years that the company showed an increase in quarterly profits and revenue, and the gains were "pretty dramatic," noted Richard Arvedlund, chairman of the investment committee at Cypress Capital Management in Wilmington, Del., and founder of RLA Advisors. He expects to be adding to his position to take advantage of a company with the "right product" at a time when the "country finally has an increasing supply of energy from domestic sources."

The Bottom Line
After Helmerich & Payne reported fiscal third-quarter profits, analysts raised price targets on the stock, trading near $38, to as high as $63.
.Wall Street has taken notice of the favorable trends. Following the announcement of Helmerich & Payne's results, Robin Shoemaker of Citigroup Global Markets, for one, forecast earnings of $2.52 a share this fiscal year, a boost from an earlier estimate of $2.35, and he looks for $3.10 in fiscal 2011, up from a previous estimate of $2.40. Shoemaker's price target rose to $63 a share from $54; the shares currently trade at about $38.

Helmerich & Payne is well-capitalized and using its cash flow to pay down its modest debt as well as to fully fund the construction of the FlexRigs on order. It also holds shares in Atwood Oceanics (ATW) and Schlumberger (SLB) that had a recent market value of about $300 million. In all, a rich deposit for investors.

Buck