Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Helmerich & Payne, Inc. (HP), Occidental Petroleum Corporation (OXY): Two Companies That Are Improving Shareholder Equity and Another That Isn’t

Helmerich & Payne, Inc. (NYSE:HP)It is companies that are working hard to improve shareholder equity and returns on shareholder equity that are usually the best investments for the future, as growing equity usually means a growing company.

To weed out some of the best looking company’s in the S&P 500, I started by looking for firms that had an earnings-before-interest-and-tax margin of around 20%, indicating a good flow of cash in to the company’s coffers. Secondly, using historic figures, I whittled down the results to companies that had achieved a five year average return-on-shareholder-equity of greater than 15% to draw out the companies that have consistently delivered a good return on shareholder capital.

Lastly, I searched through analyst predictions and reports to whittle down the remaining candidates, looking for companies that were predicted to improve their gearing ratio by at least 50% over the next three years. For example, a company’s net debt to shareholder equity ratio should fall by 50% over the next three years, indicating improving free cash flows, fiscal prudence, and balance sheet strength.

Note: for the purpose of this piece, gearing is total debt divided by shareholder equity.

The results

Firstly, contract driller Helmerich & Payne, Inc. (NYSE:HP), which has achieved a 13.5% return-on-shareholder equity (ROE), on average per year for the last five years. Part of this strong consistent return is the company’s wide EBIT margin, which for 2012 stood at 28.2%.

Company EBIT margin, 2012 ROE 5-yr average
Helmerich & Payne 28.20% 13.50%

Helmerich & Payne, Inc. (NYSE:HP)’s EBIT margin is forecast to widen as the company pays down debt and gearing is expected to move into negative territory (net cash balance) this year. Indeed, I can see that in the company’s first-quarter results, gearing had already started to fall, from a level of 3% at the end of last year to 1.5% at the end of the first quarter. The company’s ROE also ticked up slightly based on Q1 annualized data to 14.5% from the 13.5% five-year average.

A chart showing Helmerich & Payne, Inc. (NYSE:HP)’s predicted gearing over the next few years. I have added a logarithmic moving average with a four period prediction to highlight the improving cash position of the company during the next few years.

Next up

Next up is Occidental Petroleum Corporation (NYSE:OXY), which is fast becoming the next major oil conglomerate and is rapidly closing the valuation gap on the world’s third-largest company by revenue, Gazprom. (Gazprom’s currently trading at a record low valuation of two times forward earnings with a market cap of approx. $85 billion. Occidental Petroleum Corporation (NYSE:OXY) is worth $77 billion, trading at 16 times forward earnings.)

Company EBIT margin, 2012 ROE 5-yr average
Occidental Petroleum 37.80% 15.90%

Occidental Petroleum Corporation (NYSE:OXY) has an EBIT margin of 37.8% and has achieved an average ROE of 15.9% during the past five years. The company does pay about 40% tax however, which impacts its net profit margin, sending it down to around 21%.

Having said that, Occidental Petroleum Corporation (NYSE:OXY) is still forecast to rapidly pay down its debt over the next few years. Once again, I have added a logarithmic moving average with a four period forecast to show how the debt will fall in the future.