For the week ended May 22, 2015, Baker Hughes (BHI, Financial) rig count overview has some encouraging data. In one week, the rig count declined by just 3 in the United States and by 5 rigs in Canada. Since the same period last year, the rig count has declined by 972 and I am of the opinion that the rig count is likely to stabilize at current levels in line with stabilization in oil prices.
While I advised gradual exposure to selected onshore rig companies in the past, I am of the view that investors can consider further exposure to onshore rig companies as the downside momentum in rig count has stalled and the worst has been discounted by onshore rig stocks.
Helmerich & Payne (HP, Financial) is my first stock pick in the onshore rig industry and I have written on this stock in the past recommending gradual exposure. For YTD15, the stock has moved higher by nearly 12% and the latest rig count data is an indication that there is further upside for the stock in the coming months.
The first reason to like Helmerich & Payne is the fact that the company offers a healthy dividend payout of $2.75 per share, translating into a dividend yield of 3.6%. Further, the company has a low leverage and this ensures healthy financials will sustain even if the industry remains depressed for the prolonged period.
The second reason to like Helmerich & Payne is the fact that the company has excellent assets with a modern rig fleet. If the industry does trend towards recovery, the company’s fleet will see increasing demand and utilization in the coming quarters.
The second stock that I am bullish on in the onshore rig services industry is Patterson-UTI Energy (PTEN, Financial). I had written on this stock in the past where I opined that the stock is in a consolidation zone and investors can consider some exposure to the stock.
For YTD15, Patterson-UTI Energy has surged by 29% and this is an indication of the point that the industry has bottomed out. As compared to Helmerich & Payne, this stock does not provide a very high dividend payout and the company’s current payout is $0.4 per share, translating into a dividend yield of 1.8%.
However, I like Patterson-UTI Energy because of its excellent assets. The company has 149 APEX rigs that are considered to be of high quality and by December 2015, the APEX rigs will increase to 161. With quality rigs, the company is best positioned for strong recovery when the onshore market witnessed revival.
Further, the company also has a strong balance sheet position. While I rate Helmerich & Payne higher in terms of balance sheet strength, I believe Patterson-UTI Energy also has no credit concerns in the medium to long-term with a debt to capital ratio of 24% and a net debt of $943 million.
In my view, investors can consider exposure to one or both of these stocks at current levels. The onshore rig services industry might not see strong revival in the next few quarters, but the industry has bottomed out in all probability and I expect onshore services companies to report better backlogs in the coming quarters. With the names discussed above having a quality set of rigs, I expect these two stocks to outperform peers.
