What's in Store for Helmerich & Payne?

When Helmerich & Payne (NYS: HP) reported first-quarter numbers Tuesday, the results were quite strong. The company reported new records for both revenue and income from continuing operations of $732.6 million and $144.3 million, respectively. These records were driven by record rig activity, an impressive feat given the weak natural gas price of late.

Weak natural gas market
The low price of natural gas isn't a surprise to investors in the energy sector. Natural gas prices in the U.S. have been adversely affected by increased supply and a warm winter. This has, of course, affected producers and their capital allocation decisions. As the price of gas has plummeted, the rates of return on dry gas plays have come down in lockstep. This has facilitated a shift from dry gas to oil and liquids.

Helmerich & Payne is keenly aware of such developments and keeps a close eye on them. In the past, the company notes, the price of natural gas had been the single most important determinant for overall rig count. However, the shift to oil and liquids, along with the shift toward more complex well designs and higher performance rig requirements, has transformed the market dynamics.

Fleet management
Older, mechanical rigs have been retired faster than in previous cycles due to the changing landscape. In fact, as many as 180 rigs were officially retired last year. With much of today's drilling dedicated to unconventional shale plays, companies are now playing a different game, for which H&P has been preparing for some time now.

The company no longer operates mechanical rigs and less than 10% of its active U.S. land fleet is made up of SCR rigs. That means more than 90% of its fleet is made up of its newer FlexRigs, which run on the company's more advanced AC drive technology and are better suited to drill in the shale plays across the U.S. Moreover, the company expects demand for its FlexRigs to remain strong based on positive conversations with potential customers regarding additional newbuilds.

Looking forward
Currently, the company has 236 contracted rigs and 23 idle rigs, which makes up a 91% utilization rate. Of those 236 contracted rigs, 152 are on term contracts for the second quarter of the fiscal year, an average of 148 rigs will be contracted for the last three quarters of fiscal 2012, and an average of 121 rigs will be on term contracts for fiscal 2013. As time elapses, of course, the company could revisit some of these contracts as they expire and aim to extend them.

Looking out over the next two years, H&P has 40 rig orders remaining, 30 to be delivered in fiscal 2012 and 10 more for fiscal 2013. These rigs will further upgrade the company's already modern fleet, bringing the average age down further. While fleet expansion allows for growth in good times, it can lead to lower rig utilization if times get tough. The company doesn't foresee any issues in the near term, but it's something to watch in the future.

Foolish bottom line
H&P is coming off of a record quarter and is poised to benefit as long as rig activity remains robust. The company has overcome low natural gas prices thanks to oil and liquids activity, but higher natural gas prices would provide more visibility on rig utilizations going forward. As long as oil and liquids prices don't plummet, however, the company seems poised to continue its strong fiscal 2012.

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At the time this article was published Paul Chi is an analyst on the Fool's Alpha and Duke Street services. You can follow him on Twitter to stay up-to-date on his latest market commentary. Paul and Matt Argersinger co-manage the Street Fighter portfolio, where they look for cheap, unloved stocks with home run potential. Paul owns no shares in any of the companies mentioned.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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