Helmerich & Payne, Inc. (HP), Nabors Industries Ltd. (NBR): Suddenly This Becomes a Dividend Play

Prior to June 5, Helmerich & Payne, Inc. (NYSE:HP) was seen as a solidly run contract drilling firm with a small dividend. The company made a surprising announcement that it would dramatically increase the yield making the stock interesting for the yield now. Or maybe it wasn’t that surprising considering the expected influx of cash and a strong balance sheet.

The company operates primarily as a contract drilling firm with a fleet including 302 land rigs in the U.S., 29 international land rigs and nine offshore platform rigs. The land fleet includes 300 proprietary FlexRigs.

Helmerich & Payne, Inc. (NYSE:HP)

Dividend details

Helmerich & Payne, Inc. (NYSE:HP) declared a dividend of $0.50 per quarter beginning with the third quarter of fiscal 2013 ending June 30. The dividend was increased more than 200% from the previous level of $0.15. The dividend is payable on Aug. 30 to shareholders of record at the close of business on Aug. 15. The new dividend yield is nearly 3.2%.

Selling equity positions for cash

Helmerich & Payne, Inc. (NYSE:HP) recently unloaded a significant portion of its equity portfolio in Atwood Oceanics, Inc. (NYSE:ATW). The company agreed to sell 4 million shares back to Atwood Oceanics, Inc. (NYSE:ATW) and a financial institution for over $200 million providing significant cash to fund the much higher dividend.

After this transaction, the company still holds 4 million shares of Atwood Oceanics, Inc. (NYSE:ATW) and 967,500 Schlumberger Limited. (NYSE:SLB) shares. The value of these holdings equals roughly $286 million at current market prices. Future sales of these positions will help fund potentially higher dividends or even some stock buybacks if the company so chose.

Other yielding drillers

Other drilling-related stocks offer compelling yields already. Fellow contract land driller Nabors Industries Ltd. (NYSE:NBR) only offers a 1% yield making Helmerich & Payne’s new yield more appealing. Nabors Industries Ltd. (NYSE:NBR) has nearly double the revenue base, but the stock is worth less due to a much worse balance sheet. Nabors Industries Ltd. (NYSE:NBR) carries a significant net debt load of nearly $4 billion making it less appealing than the net cash position of Helmerich & Payne.

Outside of land drilling, offshore drilling firms such as Transocean LTD (NYSE:RIG) and ENSCO PLC (NYSE:ESV) offer similar yields already. Transocean LTD (NYSE:RIG) offers a more compelling 4.5% yield while Ensco offers a similar 3.3% yield.

Both stocks are considerably larger than Helmerich & Payne, Inc. (NYSE:HP). Surprisingly the offshore drillers command lower earnings multiples, even though this business line relies more on a diverse international market with longer-term contracts. In addition, the international markets have more favorable end user demand fundamentals with considerably higher commodity prices to fuel strong pricing and margins.