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DemonDoug (99.87)

Helmerich and Payne (HP): Am I Early?

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November 12, 2008 – Comments (6) | RELATED TICKERS: HP

In my previous blog post I layed out a few stocks that I thought were worthy buys in the current environment, at least for diversification away from the dollar.  My top buy was Helmerich and Payne (HP), which in my opinion is the best domestic oil driller out there.  I'm trying to remember where I first learned of HP, I know it was somewhere here on the Fool, but I can't remember who exactly pointed it out.

In any case, I do believe that if/when oil returns to it's fundamental increase in value, HP will be situated better than almost any oil/gas based company out there to give the retail investor outsized returns.  If you feel there is a better one (MDR, WFT, COP, PBR?), I'd love to hear what your favorite oil/gas based play would be.

In the meantime, the overall question for HP and any other oil and gas based company is when will oil hit the bottom.  I'm not sure where it is, I'm not sure anyone knows where that bottom is, only that at some point oil will rebound.  So the question is: Am I early?

Am I early when I bought 50 shares of HP at 25.19/share?  In the ultra short-term it is obvious I was early, as the price per share has dropped below 25.  But the more pertinent question is am I early overall, is oil headed into the 40s or below, or is oil finally at or near a bottom?

And by the way, I did buy into HP because I am currently underweight the energy sector in my currently meager portfolio, and needed more exposure both to energy and to an industry that will hedge against possible future high inflation.

6 Comments – Post Your Own

#1) On November 12, 2008 at 4:01 PM, TDRH (99.98) wrote:

Seems like dollar based commodities should rise with the fall of the dollar, but the dollar keeps gaining strength.   I own MDR, but I learned that they are upside down a three major projects in the Middle East and they are fixed bid, not cost plus, so they are bleeding in their backlog.

I like the service companies better than the actual drillers, but they are being punished as well.  By buying into the service companies your risk is spread a little more than just the focused drilling contractors.  They make money no matter who wins the contract. 

 NOV I own and it has been hammered.    Have to believe that it will bounce back.   I bought CAM at $27 and I have seen it fall to $21.00.    After years of consolidation there are just a handful of suppliers left and they dominate new construction and MRO. 

As for individual drillers I do not see any of them as long term investment.   They will rise and fall like the tide.   One thing to consider though are the barriers to entry for the market they pursue.    Land rigs require the least investment, lowest day rates, and the supply of rigs can quickly outstrip demand.  Companies like Nabors, your H&P and others are in a commoodity rig zone, where it is dog eat dog.   

Jack-up rigs require a huge investmet, but with the increase in day rates, private capital has formed for start up ventures like Scorpion and others.   These rigs were built fast and on the cheap to try and get in while the getting was good.   Ultimately the day rates for jackups will fall as well.   Examine the jackup companies carefully.  Are they financing new construction from operations or debt?  Do these new builds already have contracts before they leave the shipyards.   What are the penalties for delay. 

       Ultimately the premier day rate and risk is in the deepwater semi submersible and drillships.   Offshore drilling continues to go deeper and deeper.   The barriers to this type of drilling are very high, but demand is a cost benefit balance with the price of oil.   RIG is the ultimate deepwater investment, but with reward comes risk.

       I say stick with the suppliers, the shift in demand for rigs is past by my estimation.  With new rigs coming to market and a declinging price of oil, individual drilling companies are not a long term investment.  

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#2) On November 12, 2008 at 6:03 PM, Tastylunch (99.59) wrote:

I think you are early, as demand is dropping dramatically everywhere and the Hedgies have more redemptions coming next month. Oil is headed I think, the trend has not been broken.

I did like HP in the past but haven't looked at them lately, thanks for the idea.

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#3) On November 12, 2008 at 6:56 PM, abitare (99.51) wrote:

I think you are early. Why try and catch these falling knives? I do not understand why fight the trend at this point?

Banks offer CDs which pay 4% and guarantee 100% return on your money. Why loose 20-40% trying to buy "deals" in this current market enviroment? 

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#4) On November 12, 2008 at 6:59 PM, nuf2bdangrus (< 20) wrote:

I truly believe that the true bottom will be a basing rather than a "V", which means there will be plenty of time not to be late.

 

This bear that got burned on shorting then got burned naked long hiolds very little (yet)

 

Jeremy Grantham  S&P 600.  Buy your stocks when oil hits 40.  It may even hit 30 if you believe Dennis Gartman, who is right more often than he is wrong.

 

Or do what I will do.  DCA in since plunging in all at once can be lethal to a portfolio.  

 

There is nowhere to hide right now.  Dollars sre still king.  For how long?  We all know what will happen.  We just don't know when.

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#5) On November 12, 2008 at 11:45 PM, Ayax2006 (99.03) wrote:

It's anybody's guess if you are early or not if you enter at today's prices.  Long term oil prices are heading higher, but in the short term it is likely that the price "over-shoots" on the way down, just as it did on the way up.  If you decide to go in, it is smart to buy in 1/3s, as TMF recommends, but I agree, there is no rush, you will probably have at least a few months to enter at the current prices, if not better prices. Things will most likely get worse before they get better, especially once we see the full picture of the 4th quarter, which is not going to be pretty.  Think about it, who is going to buy a car from the big 3 if there is uncertainty whether they will be around in 3 months (not to mention the quality of their products)?  And who is going to go to the mall and actually buy something meaningful if their jobs may be on the line or if their main "asset" is holding a big mortgage??  It is going to be a long winter and we may see capitulation before Jan 20.

So the big question is where and how to protect the cash given that cash in dollars is also at risk?  Sooner or later the buck will adjust to the economic reality, including a big fiscal deficit that keeps growing every day.  My guess is that natural resources, precious metals and perhaps TIPS will eventually do the trick, but so far that strategy would have been a losing strategy, and cash has been king, as nuf2bdangrus pointed out.

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#6) On November 13, 2008 at 1:50 AM, DemonDoug (99.87) wrote:

I think I'm more bullish on oil than virtually everyone else on caps lol.  I just checked rudolphsteiner, he's now pretty deep in the red, I think he's probably the only bigger oil bull than myself.

Good comments by all.

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