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On Dec 13, 2013, we upgraded Tulsa, Okla.-based contract drilling services provider, Helmerich & Payne Inc. (HP - Analyst Report) to Outperform from Neutral. Our new investment thesis is supported by a Zacks Rank #2 (Buy).

Why the Upgrade?

We remain optimistic about the firm’s long-term prospects, supported by its superior and diversified drilling fleet, continued strong operating performance led by an efficient management team, and an investor-friendly financial policy.

Detailed Analysis

Helmerich & Payne is a major land and offshore drilling contractor in the western hemisphere, having the youngest and most efficient drilling fleet. The company, which has surpassed earnings estimates in each of the last 6 quarters, specializes in shallow to deep drilling in oil and gas-producing basins of the U.S. and in drilling for oil and gas in international locations.

We believe that Helmerich & Payne’s technologically-advanced FlexRigs are the key to its success, helping to increase its count of active rigs and maintain relatively strong daily-rate margins even during times of market uncertainty. The company’s proprietary FlexRig design makes the rigs move faster than conventional rigs, drill quicker and more efficiently, and allows for a safer operating environment. As such, these are better suited for the new demands of the exploration business and, therefore, command higher dayrates and utilization than rigs from other land drillers.

Helmerich & Payne – which counts Nabors Industries Ltd. (NBR - Analyst Report) as one of its major competitors – recently approved a raise in its quarterly cash dividend to 50 cents per share ($2.00 per share annualized), representing an increase of more than 200% over the previous payout. The significant dividend hike not only highlights the company’s commitment to create value for shareholders but also underlines Helmerich & Payne’s strong cash generation capabilities.

Furthermore, Helmerich & Payne’s strong contract drilling backlog, which now stands at around $3 billion, not only reflects steady demand from its customers but also offers long-term earnings and cash flow visibility.

Another positive in the Helmerich & Payne story is the quality of its client base, which mostly includes well-capitalized oil majors or large independents.

Other Stocks That Warrant a Look

Other players in the oil and gas drilling industry, which look attractive at current levels, include Pacific Drilling S.A. (PACD - Snapshot Report) and Tesco Corp. (TESO - Snapshot Report). Both these stocks carry a Zacks Rank #1 (Strong Buy).
 

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