Helmerich & Payne (HP): A Fallen Dividend Champion

Helmerich & Payne Inc (HP) is a fallen Dividend Champion. The company had paid a growing dividend for 47 straight years. This made the company close to becoming a Dividend King. The streak needed to continue for three more years to reach 50 years of consecutive dividend growth. Notably, this time period included both the dot.com crash and the Great Recession. But the triple whammy of the coronavirus, oil price wars, and transportation restrictions was likely too many ‘Black Swan’ events at once for the company. On April 1, 2020, the company announced that the quarterly regular cash dividend would be cut from $0.71 per share to $0.25 per sh are for future dividends. This makes Helmerich & Payne a fallen Dividend Champion as it will curtail the streak of dividend increases.

Overview of Helmerich & Payne

Helmerich & Payne was founded in 1920 in Tulsa, OK. The company is engaged in drilling oil and gas well for exploration and production companies, or oil majors. Helmerich & Payne has four business segments U.S. Land, Offshore, International Land, and H&P Technologies. The company has operations in Colorado, Louisiana, Ohio, Oklahoma, New Mexico, North Dakota, Pennsylvania, Texas, Utah, West Virginia, Wyoming, Gulf of Mexico, Argentina, Bahrain, Colombia, and UAE. Total revenue was $2,798 million in 2019.

Helmerich & Payne’s Dividend Is Cut

The specific statement from the company is as follows:

As part of the Company’s commitment to long-term shareholder returns and at the same time maintaining its strong financial position, consistent with its previous announcement on March 23, 2020 that it was reviewing its capital allocation policy, the Company announced it intends to reduce the future quarterly dividends to $0.25 per share. The declaration and amount of any future dividends, and any future increase or decrease, is at the discretion of the Board of Directors and subject to the Company’s financial condition, results of operations, cash flows and other factors the Board deems relevant. H&P also reaffirms its commitment to pay the previously announced $0.71 per share dividend on June 1, 2020, to stockholders of record at the close of business on May 11, 2020.

Drilling Demand Is Down

In hindsight the dividend cut was likely not surprising. Prices for West Texas Intermediate or ‘WTI’ crude had dropped to a two-decade low. Demand for the company’s services probably fell off a cliff. In the U.S., the oil rig count continues to drop and was 562 at end of last week. Notably, the rig count was above 800 as recently as May 2019. A lower oil rig count simply means that there is need for Helmerich & Payne’s contract oil & gas drilling services.

There is almost literally an ocean of oil in storage worldwide both on land and at sea in tankers. Hence, I view it as very unlikely that demand for oil and Helmerich & Payne’s oil & gas drilling services will rebound rapidly in the near future in the U.S. Note that the company has presence in international markets and in offshore platforms. But the company’s largest number of oil rigs are in the U.S. In any case, demand is likely to stay suppressed worldwide for the foreseeable future.

Helmerich & Payne’s Dividend Safety

But with that said, the stock was arguably signaling that the dividend was not safe for some time. In my most recent article on the Dividend Champions, some of Helmerich & Payne’s dividend metrics were questionable from the context of dividend safety. The trailing 5-year earnings per share growth rate was (15.4%), which is not good from the perspective of dividend safety. A negative earnings growth rate over an extended period of time is in my opinion a warning sign that the dividend may not grow in the future. If the earnings decline is steep enough then the dividend may not be supported by earnings at all. In fact may be cut. Earnings per share were negative for Helmerich & Payne for three of the past five years meaning that the company was experiencing losses. In fiscal 2019, the dividend was not covered by earnings at all due to an operating loss.

Interestingly, the dividend was reasonably well covered by cash flow in fiscal 2019. Operating cash flow was $856 million and capital expenditures were $458 million giving free cash flow of $398 million. The dividend required $313 million giving a dividend-to-FCF ratio of roughly 79%. This is above my threshold of 70%. But still it is not too bad considering the challenges for energy companies over the past few years. However, it does point to the steep decline in oil prices. It also suggests that demand declined considerably in the past month as oil prices collapsed leading to a decrease in cash flow. In turn, this probably placed future dividend payouts in a more precarious position.

Even debt was not a significant problem from the perspective of dividend safety prior to the decline in oil prices. At end of fiscal 2019, Helmerich & Payne had $401 million in cash, equivalents, and short-term investments. There was no short-term debt and only $479 million in long-term debt meaning that the cash position almost covered total debt. Interest coverage was over 8X and the leverage ratio was only 0.1X. From a dividend safety perspective these are decent values.

Final Thoughts on Helmerich & Payne A Fallen Dividend Champion

Although Helmerich & Payne is a fallen Dividend Champion it still pays a dividend. What about the future? I think that the current regular cash dividend will be safe for the moment provided oil and natural gas demand does not decline further and oil prices do not drop further. At an annual regular dividend rate of $1.00 the company would need about $108 million to pay the dividend. Even if earnings are negative and cash flow takes a steep 50% hit, the company still has sufficient funds on the balance sheet to pay the dividend for a quarter or two.

However, one must emphasize that this assumes business conditions do not deteriorate further. If it does the rig count will decline further and lead to lower demand for Helmerich & Payne’s services. On the positive side, oil prices have recently surged in the optimism of production cut back by Russia and Saudi Arabia. This will likely relieve some pressure on the beleaguered oil service industry. However, it is not yet clear if oil production will be cut.

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