Quick Take: Helmerich & Payne

It is clear that the commodity market is in the dumps.  The chart below outlines the course of the Bloomberg Commodity Index since the July 2008 peak.

With the decline that has occurred in the index, it would be obvious to any long-term investor that there are values to be had.  Yeah, there are risks but we’re investors not savers (anyone confused about the difference between saving and investing?  Savers expect the money to be there no matter what, investors are taking the risk that more or less will be there, after the passage of time).  One idea that we think is worth entertaining (or researching) is a stock that we’ve followed for many years.

But first the disclaimer.  Oil is soon on it’s way out.  The alternatives like solar, super batteries, windmills and geothermal are going to replace the role of oil.  In addition, a production war has broke out with Saudi Arabia trying to put shale producers out of business and Iran is about to come on-line with massive amounts of production.  Goldman Sachs is saying that the price of oil could fall as low as $20, a proposed decline of more than -50% from the current level.  The unthinkable is about to happen, just like with coal, once there were fears that we’d run out instead we’re experiencing a glut.  Those are the risks.

In spite of all the bad news for the oil sector, there are still opportunities depending on the company selected and the timing of the purchase.  One company that we like is Helmerich & Payne (HP). According to Yahoo!Finance, Helmerich & Payne (HP) “…operates as a contract drilling company in South America, the Middle East, and Africa. It provides drilling rigs, equipment, personnel, and camps on a contract basis to explore for and develop oil and gas from onshore areas and fixed platforms, tension-leg platforms, and spars in offshore areas.”

Based on the work of Edson Gould, Helmerich & Payne has declined below the conservative and midrange targets of $76.82 and $58.13, respectively.  All that is left for the downside, on a technical, is the extreme downside target of $39.43.

While it would be nice for the extreme downside target to the best point for acquisition the reality is that there is likely room on the downside. In the last period when Helmerich & Payne experienced a parabolic rise and fall, the stock price declined –78%.

If HP were to achieve a similar –77% decline as the period from June 23, 2008 to December 4, 2008, HP would fall to the $27.29 level.  We advise that investors consider HP at the ascending $39.43 level or below.

The fundamentals for HP are solid with Value Line Investment Survey indicating that the fair value of the stock is at $49.70 based on reduced estimated 2016 cash flow of $7.10.  HP is burdened with long-term debt that is 10% of capital. Shares outstanding have increased +9% since 1999 which is a positive as debt and share increases have been kept in check.

The dividend payout ratio is an decent indication of the best times to consider a stock.  Whenever the dividend payout ratio exceeded 80% the price of Helmerich & Payne was at a relative low.  Already, HP is at a payout ratio of 91.67% based on estimated 2015 earnings of $3.00 per share.

Assuming the world of oil is going to disappear, there are no decent oil sector stocks.  However, if a sliver of the industry remains after the current rout, then Helmerich & Payne will be one of the survivors, as they were after the 1980’s collapse.