NYSE: HP | Deeksha C., Ankur S., Senjie W., Dominic D., Ben E.| BIG Pitch 1/21/18

Helmerich & Payne, Inc.

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

Q/A

Agenda1. Business Overview

a. Rig Fleetb. Contractsc. Customer Concentrationd. Utilizatione. Recent Acquisitions

2. Industry Overview3. Competitors4. Variant Perception5. Valuation6. Risks7. Appendix

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

Q&A

Business Overview

● Market Cap: 7.69Bn● Dividend: 3.94%● Short Float: 17.84%● EV/EBITDA: 18.78● Debt/Equity: .12

Q&A

Stock Overview

Key Metrics Commentary

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

Historical Performance

● From Jul. 2014 to Sept. 2017 stock was down 64%○ Primarily due to crash in oil prices as well as early

contract terminations● Since Sept. 2017, the stock has rebounded 65% (still

down 40% from highs)○ Primarily due to rising oil prices and rebounding

utilization

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Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

Q&A

Rig Fleet

FlexRigs v. Mechanical/SCR Rigs● The company’s flagship electrical rig that significantly reduces average rig move and drilling time compared to older

mechanical rigs● Although more expensive, electrical rigs have proved to provide enhanced performance, resulting in savings over time● Helmerich & Payne was the first to adapt to AC electric rigs in the later generations of FlexRigs, which allowed for even

more accuracy, safety, and efficiency compared to the inferior SCR electric rigs● More recently, Helmerich & Payne has been actively working on upgrading their current fleet of FlexRigs to become

Super-Spec drills

H&P U.S Land Fleets

● Contracts alloted through competitive bidding or current customer negotiation

● 6 mo to 5 yr in duration, can be terminated early for a fee● Additional charges to mobilize and demobilize contracts● “During fiscal 2017, all drilling services were performed on a

“daywork” contract basis, under which we charged a fixed rate per day, with the price determined by the location, depth and complexity of the well to be drilled, operating conditions, the duration of the contract, and the competitive forces of the market.”

●

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Contracts

Description Rig Profitability

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

Rig Fleet Under Contract (as of Dec. ‘17)

● H&P has historically won contracts where it is not the lowest bidder

● Spot pricing- trending a little above $20K per day and tracks demand (increasing)

● $5-8M upgrade costs per rig● H&P’s US Land rig margin is about $1500 higher than its

closest competitors’

Q&A

● Operates primarily in North and South America● H&P specializes in shallow-to-deep drilling in oil and gas

producing basins for the US and in drilling for oil and gas in international locations

● United States: Customers are primarily from major oil companies and larger independent oil companies

● South America: Customers are primarily major international and national oil companies

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Customer Concentration

Geographical Distribution Customers

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

Competitive Advantages● H&P possesses the most technologically advanced rigs in the industry and can cheaply upgrade their outdated rigs

○ H&P developed a new generation of highly mobile and depth flexible land drilling rigs (FlexRigs) in the mid 1990s● FlexRigs are particularly well-suited for more complex horizontal drilling requirements and has been able to reduce average rig

move and drilling times compared to similar depth-rated traditional land rigs○ These allow greater depth flexibility and provide depth-rated traditional land rigs

● H&P has actively pursued innovation within the FlexRig - they are now on FlexRig5● Increased their active fleet by 96 rigs during the most recent fiscal year and 86 were super-spec upgrades

● 68% of consolidating operating revenues came from their ten largest drilling contracts in FY 2016

● Three largest customers: Occidental Oil and Gas Corporation (“Oxy”), Continental Resources (“Resources”), and Yacimientos Petroliferos Fiscales (YPFs)

● Control drilling services on a world-wide basis for Oxy

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Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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Utilization

Utilization Statistics & Rig Demand

● Rig Utilization is dependent on demand from oil companies● Historically, Helmerich and Payne has seen much higher utilization numbers in all of their operating

segments

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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Recent Acquisitions

MOTIVE

● H&P announced the acquisition of MOTIVE Drilling Technology on May 22, 2017

● MOTIVE is a properioty Bit Guidance System and is the industry leader in the use of cognitive computing to guide the directional drilling process, which has proven to lower drilling costs

● Its focus on accurate horizontal well drilling can aims to consistently follow a optimal well path prescribed by geologists and engineers

● MOTIVE will continue to operate independently after the acquisition. The decentralized operation will allow greater freedom for MOTIVE to focus on research and development

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

Q&A

Recent Acquisitions

MagVAR

● H&P announced the acquisition of Magnetic Variant Services (MagVAR) on on December 8, 2017

● MagVAR is an industry leader in enhancing the accuracy of directional drilling and wellbore optimization

● MagVAR technology has been successfully deployed into both onshore and offshore fields in North and South America, Europe, Africa, and Asia

● H&P working with both MagVAR and MOTIVE Drilling means they will have greater potential to reduce positional uncertainty in the drilling process

Business Overview

Industry Overview

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Valuation & Risks

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Industry Overview

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U.S. Market Share

Industry Dominance

Future Prospects

● H&P is the market share leader for U.S. land drills in both total drills and AC drills at roughly 20% and 30% respectively

● Since the 2014 peak of oil prices, H&P has gained just shy of 5% market share in U.S. land drill market share, the most growth out of any U.S land drill companies

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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● H&P has the largest idle 1,500 hp AC drive land rigs, more than 6 times the closest competitor.

● With recent developments in oil prices and its commitment to superior technologies, H&P is in a position to gain an even larger market share in a market with higher demand for oil and drills.

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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Industry Demand

Horizontal/Directional Drilling AC Drive Rigs● As the most cost efficient choice, demand for AC drive

rigs have risen significantly over the past decade● Top 10 E&P operators - 80% AC Drive Rigs● Next 130 E&P operators - 70% AC Drive Rigs● Remaining E&P operators - 39% AC Drive Rigs

● Horizontal & Directional Drilling has become the industry standard for exploration and production companies

● Top 10 E&P operators - 96% horizontal/directional rigs● Next 130 E&P operators - 95% horizontal/directional rigs● Remaining E&P operators - 64% horizontal/directional rigs

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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Competitors

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Technological Advantage

Super-Spec Rigs

Total AC Drive Super-Spec FlexRigs

● H&P holds almost 45% of all Super-Spec capable AC Drive FlexRigs○ Super-Spec rigs are capable of drilling a new well in 10 days (a week less than the average normal rig)

● Many of H&P’s remaining Flex3, Flex4, and Flex5 rigs are convertible into Super-Spec rigs without large Cap-Ex investments, and the company has been rapidly converting these rigs at around 8 per month○ H&P has about 100 possible upgradable Super-Spec rigs

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Additional Commentary

● Utilization for this type of rig is over 90%● Competitors such as PTEN are presenting

Super-Spec Flex-Rigs as a great opportunity to expand their fleet, and will face higher costs than HP if they pursue this route○ Only FlexRigs are directly convertible and

H&P has around 100 of an estimated 250 available convertible rigs

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Industry Overview

Competitors Variant Perception

Valuation & Risks

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Competitor Head-to-Head

Competitors vs HP in key metrics

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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HP PTEN NBR PDS

Market Share 19% 16% 11% 7%

MS ChangeMay `16 - Dec `17

3.2% .1% 1.1% .4%

Debt/Equity .12 .16 .92 1.27

Utilization (Q3 Apx.) 55% 66.1% 47.6% 32%

Day Rate (Q3 Apx.) 25.04 20.49 21.5 15.4

● HP has a lower debt/equity ratio, larger market share, and a higher day rate than competitors● Combined with its margin premium, HP is leading the competition on multiple fronts

Business Overview

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Valuation & Risks

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Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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Variant Perception

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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Variant Perception

Street’s Perception

H&P faces industry-wide headwinds that will damage their profitability; without a large increase in oil prices, the company will struggle.

H&P is unprofitable during the oil downturn due to a systemic issue in the business. This unprofitability will continue for the next several years.

H&P unwisely hiked their dividend at the height of the oil bull market and their current dividend is neither sustainable nor driving investor value.

Variant PerceptionH&P is a secular winner, as demonstrated by their ability to consistently gain market share. Short term bottom-line weakness is due to their rapid remobilization of their rigs and is a short-term “issue”. H&P has a sustainable dividend that has been consistently increasing, best-in-class rigs, and the strongest adjusted gross margin in the industry.

RecommendationWe recommend an 4% long position at a price per share of $71.13

Target Price Upside

$99.89 48.5%

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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I. Strength among Peers

Street View

● The Street views Helmerich & Payne’s competitors with worse rig fleets as better investments. Analysts see it as fairly priced or overvalued despite the company’s consistent increase in market share, superior technology, and strong positioning.

● Analysts admit that Tier 1 Rigs will continue to see higher day rates with the uptick in drilling activity

Our View

● HP easily has the best and most rigs in the industry and is well positioned to capitalize on increasing demand for oil.

● This is evident by looking at historical rig utilization. Before 2015, the rig utilization was 89%, but it has since dropped to 45%.

● As demand increases, the utilization will increase once again and HP will be able to capture a larger segment of the market that desires more efficient, capable drills.

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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I. Industry Winner

Market Share Technology Positioning● Recent acquisition of both

MagVAR and MOTIVE Drilling shows their dedication to technological innovation

● Additional demand for super-spec FlexRigs remained in Q3 of 2017 despite negative oil prices

● FlexRigs have the highest utilization of any kind, with 90% utilization

● Upgrade costs for new FlexRigs $5-8M per rig

● H&P has a premium margin per rig in relation to competitors

● H&P has 100 potential upgrade candidates for FlexRigs

● Most of the FlexRigs on the market are sold out

● Half H&P’s long term contracts expire in 2018, allowing to take advantage of favorable day rates

Our View

● ~22% market share of the horizontal/directional rig count vs. its closest peer (16%)

● Not only is HP a market leader in horizontal/directional drilling, they are leader in the Permian Basin, one of the most popular geographies in the market

● Super Spec FlexRig market share is ~40%, if they fully convert this can become 52%

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Valuation & Risks

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II. Profitability

Street View

Our View

● The Street views Helmerich and Payne’s negative net income as an operational problem, but this is not the case

● If they keep utilization the same (including 4th quarter) they can increase EBITDA by $100M● CapEx is going to be relatively high until as demand picks up due to rig start up costs and the integration of its new fleet● H&P has not incurred any significant debt when funding fleet improvements and upgrades

“Approximately half of our 200 contracted rigs today are under term contracts, and roughly 40% of those rigs under term contracts were priced during strong markets before the 2014 downturn. The remaining rigs under term contracts were priced during the downturn and have a remaining average duration of less than one year.”

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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Valuation & Risks

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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Valuation Assumptions

● 2018 numbers are based on management guidance

● US Onshore has already begun to hit 55%, combined with higher day rates

● US Offshore has generally consistent utilization○ Political Climate will

ramp up demand● International Land is slower to

catch up● Rig Counts are already set by

management

● US Onshore rig revenue slightly lower/same in Q1 and set to accelerate over the next two years

● US Offshore day rates increasing

● International Land day rates decline due to issues in Colombia

● Other revenue is staying consistent

● Higher short term operating costs and depreciation

● R&D expected to continue into 2018

● Income from asset sales consistent due to the sale of old and damaged rigs each year

● Discontinued operations in Venezuela can’t be predicted

Model Assumptions

Rig Utilization Revenue Build Income Statement

Company valued using EV/EBITDA

Revenue modeled using a combined approach with rig count, utilization,

and day rates

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ValuationValuation

Base Case$99.8948.5%

(21.9% CAGR)Current Price: $71.13

● Onshore Utilization drops from Q4 number due to contracts ending

● CapEx doesn’t drop as much as it should, despite a lack of rig activation

● Dividend stays flat

● Utilization slowly increases primarily due to market-share gains and winning contracts

● Day rates continue to rise based on management guidance and slight increases in per-barrel oil prices

● Dividend increases at historical rate

Bear Case$60.71-14.6%

(7.5% CAGR)

Business Overview

Industry Overview

Competitors Variant Perception

Valuation & Risks

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Risk #1: New TechnologiesTechnological Risks Bit Guidance System

● Innovation by competition may result in legacy rigs becoming obsolete, causing huge capital expenditure for replacement as well as loss in market share

● Technology developed by H&P and its subsidiaries in the future may not work as expected and may adversely affect the business

● It may become increasingly more expensive to upgrade current inventory

Response● Historically, H&P has distinguished itself from competition in terms of technology and service as its average US land rig margin per day is 25%

more than that of its peers● Only contractor with the right AC rig fleet capacity to grow substantially without without requiring a large investment into new rigs● H&P’s focus in reducing costs and increasing margin per day for its customers has largely been successful● The large amount of idle AC rigs can be upgraded to super-spec rigs, the current standard of quality● By purchasing MOTIVE and MagVAR, H&P continues to show dedication to being the most technologically responsive company in the

industry

Business Overview

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Risk #2: Oil PricesVolatility Oil (WTI) price

● Oil prices are very sensitive to geopolitical events and speculation, resulting in potential crash similar to that of 2015

● The rise of alternative fuel can become a risk to the demand of oil and its related product

● As it primarily operates in the U.S., any environmental regulation or taxation by the government could possess a threat to oil prices

Mitigating Factors● However, oil prices have gone up in the past couple of months

and expert believe that the trend will continue in the near future● H&P has also used this opportunity to heavily invest in its rig

fleet in terms of replacing legacy rigs with upgraded super spec rigs

● As the current administration favors oil and coal, the short run prospect of a significant regulation is relatively small

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Other RisksRevenue Concentration Foreign Exchange Risk

● Around 30% of the revenue comes from 3 customers: Oxy, Continental, and YPF

● H&P’s integrated service including designing, building, and upgrading the fleet has provided its customers with the best value solution on top of its excellent customer service

● As a result H&P’s has been rated 1st in total customer satisfaction for nine years in a row by EnergyPoint Research

Dividend Risk● H&P has historically had a dividend yield of close to 5%,

making it a very attractive option for investors looking for consistent returns

● However, Many analysts are concerned with H&P’s ability to keep paying out high dividends, especially given recent negative free cash flow

● In its 3Q earnings call, management has indicated that if the market doesn’t change, the company will be able to sustain the payments

● Even in the most bear market, with a debt/equity of 0.12, H&P can take on more debt to continue to sustain its dividends

● All international contracts are paid in dollars, except for Argentina, where the Argentinian pesos are exchanged.

● However, with most of its business focused on U.S. domestic land drills, the foreign exchange risk is minimized

Current Dividend Yields

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Appendix

Base Case Revenue Build

Bear Case Revenue Build

Base Case Rig Utilization

Bear Case Rig Utilization

Base Case Income Statement

Base Case Income Statement Cont.

Bear Case Income Statement

Bear Case Income Statement Cont.

Base Case Valuation

Bear Case Valuation