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Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management Amit Shah [amitashok-‐[email protected]] Helmerich & Payne Inc. (HP) April 13, 2015

Energy – Oil & Gas Field Services Stock Rating Sell

Investment Thesis Target Price $45-‐51 Helmerich & Payne (HP) is staring at a precarious downturn in its business performance over the next two years led by a sudden and sharp drop in global crude oil prices over past few months. HP is a contract driller of oil and gas wells and own and operates a fleet of 382 rigs. HP’s business fortunes are closely tied up to the level of oil and gas production and exploration activities in the North America. At the current level of crude oil prices (WTI: $55/barrel), oil production in most of the US oil fields becomes economically unviable. It has led to closure of significant number of active rigs over last few months. Total active rigs in USA are down from 2043 a year ago to 1087 currently. We expect current oil prices to sustain for at least next one year making things worst for US oil producers. We expect further reduction in active rigs in coming months, which will have significant negative impact on business performance of HP over next 2-‐3 years. We recommend Sell on HP Drivers of Thesis • Oil exploration and production activities will continue to decline sharply

in coming months impacting the demand for field services such as drilling. • Early termination of fixed rate drilling contracts, increasing number of idle

rigs and more rigs operating on spot rates will impact the revenue and predictability of HP as spot drilling day rates have already declined by 10-‐20% last 3 months. We expect HP to have 35% of its fleet idle by the end of 2015 down from 301 in FY14 to 230 by the end of FY15.

• The day rate and higher profitability of HP is at risk compared to last downturn as all major players in the industry have upgraded their rig fleets from mechanical rigs to AC rigs thereby increasing competition.

Risks to Thesis • A sharp increase in oil prices in short time will increase the E&P activities

in US, which will in turn benefit HP • A better than expected rigs demand, day rates and day margins will have

positive impact on HP financials.

DCF $48.10 DDM $44.00 Relative Multiple $48.00 Price Data Current Price $74.00 52wk Range $54.00 – 118.95 Key Statistics Market Cap (B) $7.80 Shares Outstanding (M) 108.00 Institutional Ownership 94.4% Five Year Beta 1.17 Dividend Yield 3.9% Est. 5yr Growth -‐13.2% Price/Earnings (TTM) 12.00 Price/Earnings (FY1) 26.70 Price/Sales (TTM) 2.10 Price/Book 1.59 Profitability Operating Margin 28.4% Profit Margin 17.8% Return on Assets (TTM) 9.8% Return on Equity (TTM) 14.5%

Source: Yahoo finance; www.spdrs.com

Earnings Estimates Year 2012 2013 2014 2015E 2016E 2017E EPS $5.18 $5.63 $6.14 $2.78 $1.44 $2.59

Growth 31.3% 8.7% 9.1% -‐54.8% -‐48.1% 79.8% 12 Month Performance Company Description

Source: Yahoo Finance

HP is a part of Oil & Gas field service industry that provides ancillary services to Oil & Gas exploration and production companies. HP is one of the largest contract driller in North America. It provides drilling rigs, equipment, personnel, and camps to onshore oil and gas explorers and producers. It also provides fixed platforms, tension-‐leg platforms, and spars to Oil and Gas producers in offshore areas. The company is also involved in the business of commercial real estate and the research and development of rotary steerable technology. HP pioneered the production of highly efficient Flexrigs.

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EXECUTIVE SUMMARY

Though HP is one of the best managed and highly profitable company, it is likely to see its fortunes going down over next couple of years due to significantly adverse industry condition, which in our opinion likely to continue for next few years, and loss of competitive advantage it enjoyed over a decade. HP has certainly been the one of the best performing contracts driller of oil and gas wells in North America over past many years and managed to gain significant market share from competition owning to its highly efficient fleet of Flexrigs. However, we believe that HP will face the brunt of the current, highly precarious, industry dynamics. HP’s fortunes are closely tied up to the level of oil and gas production and exploration activities in the North America. At the current level of crude oil prices (WTI: $55/barrel), oil production in most of the US oil fields becomes economically unviable. It has led to closure of significant number of active rigs over last few months, which are down from 2043 a year ago to 1087 currently. We expect current oil prices at $55/barrel to sustain for at least next one year making things worst for US oil producers. We expect further reduction in active rigs in coming months, which will have negative impact on business performance of HP over next 2-‐3 years.

COMPANY DESCRIPTION

HP is primarily involved in contract drilling services for land and offshore oil and gas producers. It owns and operates a fleet of 382 rigs for the purpose of contract drilling. It operates land rigs in the USA (337 rigs) and various international locations (36 rigs). The company also operates offshore oil platforms in the Gulf of Mexico. The company is headquartered in Oklahoma. HP’s drilling activities are divided into three business segments viz. US land drilling, offshore drilling and international drilling. The company also has real estate interests and is involved in developing rotary steerable technology. Each of the company’s businesses operates independently through different wholly owned subsidiaries.

Although majority of the company’s contract drilling revenues are generated from USA, it has some presence in international geographies like Latin America and Middle East. The USA Land segment operates in Oklahoma, California, Texas, Wyoming, Colorado, Louisiana, Mississippi, Pennsylvania, Ohio, Utah, New Mexico, Montana, North Dakota, West Virginia, and Nevada. The Offshore segment has operations in the Gulf of Mexico and Equatorial Guinea. The International Land

segment operates in Ecuador, Colombia, Argentina, Tunisia, Bahrain, the United Arab Emirates, and Mozambique

HP’s drilling contracts are secured through competitive bidding or negotiations with customers. These contracts often cover multiwall and multiyear projects. Most drilling services are performed on a day work contract, under which a fixed rate is charged per day. However, a large portion of HP’s rigs fleet is not contracted and it works on spot rate basis. As of 31st December 2014, it had fleet of 337 US land rigs, 9 offshore platform rigs and 36 international land rigs.

HP’s real estate investments include a shopping center containing approximately 441,000 leasable square feet, multi-‐tenant industrial warehouse properties containing approximately one million leasable square feet, and approximately 210 acres of undeveloped real estate located within Tulsa, Oklahoma.

HP’s revenue mix for 2014

Source: HP 2014 SEC filings 10-‐K

HP’s International Land revenue mix for 2014

Source: HP 2014 SEC filings 10-‐K

USA$Land,$83.3%$

USA$Offshore,$6.7%$

Interna9onal$Land,$9.6%$

Others,$0.4%$

Argen&na,)30.3%)

Columbia,)24.0%)

Ecuador,)19.5%)

Others,)26.2%)

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USA land segment

The USA land-‐drilling segment provides contract-‐drilling services to the USA land oil and gas exploration and production companies. This segment is the largest revenue and profit contributor to HP. In 2014, this segment contributed 83% to the total revenue of the company. HP is one of the largest players in USA land drilling segment and had a fleet of 337 rigs in this segment by the end of 31st December 2014. Marathon and BHP are its largest customers in this segment. This segment had a rig utilization of ~86% in 2014. The fleet of FlexRigs had an average utilization of ~91% while the conventional rigs had an average utilization of ~3%. At the close of fiscal 2014, 294 out of an available 329 land rigs were working.

We expect significant reduction in the US land segment owning to sharp decline in US land rig count over last few months. We estimate the revenue from this segment to decline by 27% in 2015 and 9% in 2016 due to early termination of contracts, decline in day rates on spot contracts and more idle rigs due to reduction in exploration and production activities in US land.

Land rigs fleet size of HP

Source: Company 2014 SEC filings; 10K

USA offshore segment

The USA offshore-‐drilling segment provides contract-‐drilling services offshore oil and gas explorers in the Gulf of Mexico. In 2014, this segment contributed 6.7% to the total revenue of the company. HP has limited fleet of just 9 rigs in the offshore segment and is a small player in the offshore drilling segment. This segment had a rig utilization of ~90% in 2014. At the close of fiscal 2014, 8 out of an available 9 offshore rigs were working. All the offshore rigs work on contract basis. The number of rigs in offshore segment has remained constant at 9 rigs for

past many years due to lot of regulatory controls imposed on offshore drillings on account of environmental issues.

We expect US offshore business to report a lower decline in revenues in 2015 and 2016 respectively at 11% and 9% respectively due to fixed contracts on offshore rigs and relatively small decline in day rate for offshore rigs at 10%.

International land segment

The international land-‐drilling segment provides contract-‐drilling services to the international large integrated oil and gas producers including national oil companies. In 2014, this segment contributed 9.6% to the total revenue of the company. HP had a fleet of 36 rigs in this segment by the end of 31st December 2014. This segment had a rig utilization of ~76% in 2014. In international segment the company has presence in many countries. The majority of the revenue from international drilling segment comes from three countries including Argentina, Columbia and Ecuador. These three countries contribute ~74% revenue to the international segment. Other countries include Tunisia, Bahrain, UAE and Mozambique. We remain cautious on the business in Argentina and Ecuador given the past history of these countries marred by hyperinflation and government defaults.

International rigs fleet size of HP

Source: Company SEC filings; 10K

Argentina

At the end of fiscal 2014, HP had 14 rigs in Argentina. The utilization rate in Argentina was ~80% during fiscal 2014. Revenues generated by Argentine drilling operations contributed ~3% to the total HP revenue in fiscal 2014. 2 large customers contributed ~67% of the revenue generated in. The Argentine drilling contracts are

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primarily with large international or national oil companies.

Columbia

At the end of fiscal 2014, HP had 8 rigs in Columbia. The utilization rate in Columbia was ~63% during fiscal 2014. Revenues generated by Columbia drilling operations contributed ~2% to the total HP revenue in fiscal 2014. Most of the revenue in Columbia came from 2 customers. The Columbia drilling contracts are primarily with large international or national oil companies.

Ecuador

At the end of fiscal 2014, HP had 6 rigs in Ecuador. The utilization rate in Ecuador was ~85% during fiscal 2014. Revenues generated by Ecuador drilling operations contributed ~2% to the total HP revenue in fiscal 2014. The largest customer contributed ~60% revenues to the Ecuador operations. The Ecuador drilling contracts are primarily with large international or national oil companies.

We expect revenue from international land segment to decline by 21% in 2015 and 9% in 2016 given the overall slowdown in oil production activities in Latin America. The decline in revenue will be led by 20% fall in active rigs and 10% fall in day rates.

Description of drilling contracts

Drilling contracts are obtained through competitive bidding or as a result of negotiations with customers, and often cover multi-‐well and multi-‐year projects. Each drilling rig operates under a separate drilling contract. During fiscal 2014, all drilling services were performed by HP on a daywork contract basis, under which the company charges 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. HP has previously performed contracts on a combination footage and daywork basis. Also, the company has previously accepted turnkey contracts under which it charge a fixed sum to deliver a hole to a stated depth and agree to furnish services such as testing, coring and casing the hole which are not normally done on a "footage" basis. However, HP has not accepted any footage or turnkey contracts in over fifteen years, as these contract rates do not adequately compensate for the added risks. The duration of our drilling contracts are well-‐to-‐well or for a fixed term. Well-‐to-‐well contracts are

cancelable at the option of either party upon the completion of drilling at any one site. Fixed-‐ term contracts generally have a minimum term of at least six months but customarily provide for termination at the election of the customer, with an "early termination payment" to be paid to HP if a contract is terminated prior to the expiration of the fixed term. Contracts generally contain renewal or extension provisions exercisable at the option of the customer at mutually agreeable prices

Analysis of the rigs fleet

HP has arguably the most modern rigs fleet among USA land drilling players. The nature of HP’s rig fleet gave it a significant advantage over its competitors. In 1990’s HP shifted its focus from mechanical and Silicon-‐Controlled Rectifier (SCR) rigs to Alternating Current (AC) drive technology, which are highly efficient and productive compared to traditional mechanical and SCR rigs. Further, AC rigs are better suited for horizontal drilling given its high precision and ability to drill at greater depths. Subsequently, in 1998, the company launched it AC rigs called FlexRigs, which are highly mobile/depth flexible land drilling rigs. FlexRigs are high-‐performance, high-‐efficiency rigs, which are well suited to drill more complex wells at greater depths, such as those found in the major shale basins of the USA. The FlexRig has been able to significantly reduce average rig move and drilling times compared to similar depth-‐rated traditional land rigs. In addition, the FlexRig allows greater depth flexibility and provides greater operating efficiency. The original rigs were designated as FlexRig1 and FlexRig2 rigs and were designed to drill wells with a depth of between 8,000 and 18,000 feet. In 2001, HP announced that it would build the next generation of FlexRigs, known as FlexRig3, which would target well depth of 8,000 and 22,000 feet. Subsequently, the company developed more advanced FlexRig4 and FlexRig5.

Since 1998, HP has built and delivered 344 FlexRigs, including 207 FlexRig3s, 88 FlexRig4s, and 32 FlexRig5s. Of the total FlexRigs built through September 30, 2014, 161 have been built in the last five years. As of November 13, 2014, an additional 41 new FlexRigs remained under construction.

As of fiscal year ending 2014, the company had 374 rigs, out of which 329 rigs were in USA land segment, 9 rigs were in offshore segment and 36 rigs were in international land segment. Out of 329 rigs in USA land segment, 305 were high performance FlexRigs and

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remaining 24 were other rigs like SCR rigs. HP remains leader in USA land drilling segment and has highest number of AC Drive rigs among all the competitors.

HP’s global rig fleet

Source: Investor presentation March ‘2015

HP’s USA land rigs fleet

Source: Investor presentation March ‘2015; Henry Fund analyst estimates

Company Analysis

HP has been one of the largest players in US land drilling segment with its highly efficient and technologically advanced rigs, FlexRigs, which HP first developed in 1998. Due to the development of FlexRigs, HP got a significant competitive advantage over its competitors as more and more oil and gas production companies preferred FlexRigs to traditional mechanical rigs due to the high efficiency, safety and mobility offered by these FlexRigs.

One of the best-‐managed companies in the space, but

We believe that HP is one of the best-‐managed companies in the space. It has grown its revenue and profits significantly over past decade. Further, it has a very strong balance sheet of almost no debt. Over the last 20 years, HP’s peak total-‐debt-‐to-‐total-‐capitalization ratio

has been ~20%. HP has historically kept ample balances of cash and cash equivalents. It has one of the best returns on capital ratio in the industry. It is market leader in USA land drilling segment. Further its rig fleet is one of the best and most modern among its competitors. It has been the biggest beneficiary of ongoing industry land rig replacement cycle. However, we believe that the current industry dynamics will not leave HP unscathed despite its strong position.

Business highly sensitive to global energy prices

HP’s business is highly dependent on the global energy prices as drilling activity slows down during the period of low global oil prices and vice-‐versa. Since HP provides contract-‐drilling services to its customers, its business is directly impacted by the demand for rigs by these customers. Over the last decade, due to continuous increase in global oil prices, HP’s business performed very well as it increased its rigs fleet size from 96 rigs in 2001 to 374 rigs in 2014. In the interim, the company’s business suffered in year 2009/2010 due to sudden collapse of global oil prices. However, as oil prices quickly rebounded, HP continued to grow its business and performed well.

In the graph below, it can be seen that the revenue generated by HP dropped in the year 2009/2010 following the drop in international oil prices. We expect the revenue of HP will show the similar trend in 2015 and 2016.

HP revenue sensitivity to international oil prices

Source: Company SEC filings; Henry Fund

We estimate that the global oil prices are unlikely to rebound from current levels anytime soon based on our analysis of global crude demand and supply scenario. The persistent low oil prices will result into significant reduction in the overall new oil exploration activities in the medium term. This will have adverse impact on the

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demand for drilling services by oil production companies. We estimate significant reduction in the revenue and profit of HP over next 2 years. The profit of the company is expected to fall by 55% in FY15 and 48% in FY16 due to a 25% and 9% fall in revenue in FY15 and FY16 respectively.

HP revenue forecast along with oil price forecast

Source: Company SEC filings; Henry Fund estimates

Revenues highly dependent on US shale play

Though HP has presence in international and offshore market segments, majority of its revenue (~85%) comes from US land-‐drilling segment. 92% of the rigs owned and operated by HP are used to drill oil in shale formations in various states of USA like North Dakota, Texas, Wyoming, and Oklahoma etc.

USA shale oil production is very expensive. According to industry estimates, crude oil price below US$55-‐60/barrel makes production from shale in most of the USA oil fields economically unviable due to high cost of exploring and producing oil from shale formation compared to conventional oil resources.

Due to recent downfall in global oil prices from US$106/barrel in June 2014 to US$52/barrel currently, the new exploration and production activity in most of the USA states has slowed down considerably. This is visible from sharp drop in active rigs over last year. Since most of the rigs owned by HP operated in USA land segment, its revenues are highly dependent on the activities in USA shale oil production. As seen the graph below, there has been sharp decline in USA active rigs over last few months. During the latest week ending April 10, 2015, the active rig count fell by 42 rigs week on week. Currently the total rigs count in USA at 988, which is down from 1831 a year ago, a decline of 46%.

Active rigs count in North America

Source: Baker Hughes rigs count report 10th April 2015

We believe that the active rigs count will continue to decline further in coming months due to sustained low oil prices. This will result into significant reduction in working rigs for HP and early terminations of the fixed rate rig contracts by producers. During the 1QFY15 analyst conference call, HP management mentioned that the active rigs count for HP will go down below 200 by the end of May 2015. HP’s USA land active rig count was 204 as of February 28, 2015, down from 294 at the beginning of the calendar year. We forecast rigs count to be at 200 by the end of FY15.

USA total and active land rigs of HP


Eroding competitive advantage of FlexRigs

With the development of FlexRigs in 1998, HP got a significant competitive advantage over its competitors and resultantly increased its market share in USA land drilling segment. FlexRig catapulted the company into high growth trajectory. Due to rapid modernization of its fleet to AC rigs, the company captured a significant market share over last 7 years from its competitors. A number of oil producers replaced the older mechanical/SCR rigs with AC FlexRigs developed by HP.

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Market share gain by HP in US Land segment

Source: March investor update presentation by HP

HP’s USA land AC Drive rigs fleet versus peers


During the downturn of 2009/10, HP got significant advantage over its peers as other major players were in process of upgrading its fleet of mechanical rigs. Since only HP had a large AC rigs during that time, it could still charge a premium pricing to customers.

However, we believe that this time around, HP will find it difficult to charge a significant premium over its peers as other major players like Nabors (NBR) Patterson-‐UTI Energy Inc. (PTEN) have upgraded their fleet with new modern AC rigs over last 6 years. Further, we estimate the demand for rigs will continue to be lower than supply over next few years due to significant expansion of fleet by all the players in the industry including HP. This will increase the competition for all the players resulting into lower pricing power with the drillers. We believe that HP is unlikely to see the historical average daily margins in medium term.

Current margin premium enjoyed by HP in USA land segment


HP average daily margins forecast


Falling day rates and early termination of contract risks

Due to sharp decline in demand and increase in idle rigs, the average spot day rate of rigs has started to decline. The average FlexRig spot pricing is now down by approximately 15% as compared to the average level corresponding to the quarter ended December 31, 2014. Given the current trend, we expect to see further decline in spot prices of rigs. We estimate the average revenue per day for HP to decline by ~10% over rest of FY15 and decline by 5% in FY16 before it starts improving further.

Further, the company has started getting early terminations of the fixed rate contracts from the customer. Now, HP expects total of 23 rigs contract to be terminated early. We expect early terminations to go up

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in coming months as more and more producers start shutting the production work. The management expects to receive US$60 M in early termination revenues in 2QFY15. We note that the company had received ~40 terminations during the last downturn and had received US$210 M in early termination fees during the same period. The early termination fees help HP recover some losses due to early termination of contract.

HP land average daily revenue forecast


High customer concentration risk persists

HP derived 26% of its revenue from top 3 customers in 2014. Occidental Oil and Gas Corporation, Marathon Oil Corp. and BHP Billiton along with its subsidiaries accounted for approximately 11 percent, 8 percent and 7 percent, respectively, of HP’s consolidated operating revenues for 2014. In international land segment, the company derives almost all of its revenue in Columbia from top 2 customers while in Argentina, it derives ~67% revenue from top 2 customers. We think that the excessive reliance on few customers is very risky.

Occidental Oil and Gas Corporation has already announced 33% cut in capex for CY15 after posting loss of $3.4b in 4QCY14. Marathon has announced capex cut of 20% for CY15 while BHP Billiton reduced its capital and exploration expenditure by 23% in 6 months ending December 2014 and will do 25% less capex in FY15 compared to FY14.

RECENT DEVELOPMENTS

Management gives negative outlook post 1QFY15 result

HP delivered strong performance for 1QFY15. For the quarter, total revenue increased by 19% yoy to US$1.06 B

led by strong growth in US land segment, which reported 21.6% yoy growth led by increase in total working lease from 255 in 1QFY14 to 294 in 1QFY15 and 3% yoy increase in average daily revenue to US$29,457. International land segment’s revenue declined by 2.6% yoy due to 15% decline in revenue from Ecuador, 12.3% decline in revenue from Columbia and 4.8% decline in revenue from Argentina. Rest of the countries reported healthy growth of 19.2% during the quarter. The decline in international land segment happened despite ~4% yoy increase in average daily revenue per rig. USA offshore segment reported healthy growth of 17.6% yoy to US$69.5 M. The growth was led by higher utilization (up from 89% to 98% yoy) and 12.6% yoy increase in average daily revenue to US$62,603.

Operating margins for the company improved by 170 bps yoy to 31.4% due to 5% and 32% increase in average rig margins per day in USA land and USA offshore segments. HP’s net income during the period increased by 17% yoy to US$203 M.

Despite strong result in 1QFY15, management guided for very negative outlook on all fronts. The management expects USA land average rig expenses to go up from ~$13000 in 1QFY15 to ~US$13500 in future. It expects both USA land and offshore segment. Further the company expects spot prices to continue to decline further as it has already witnessed 15% drop in spot pricing for FlexRigs. The management also mentioned that, HP could have less than 175 active rigs by the end of 2QFY15. The active rig count was 204 as of 28th February 2015. Management also guided for heavy capital expenditures of US$1.3 B amid significant slowdown in industry activity. Further management expects effective tax rate to go up in coming quarters.

HP announces US$500M debt offering

Last month HP announced private offering of US$500M senior notes. Currently, the company has very little debt on its books. However, given in the large capital expenditure plan in 2015, the company expects to partially fund it through this debt offering.

Sharp decline in global oil prices

Sharp decline in energy prices globally over last 6 months has created atmosphere of uncertainty for the entire North American energy industry. The decline reflects continued growth in U.S. tight oil production, strong

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global supply, and weakening outlooks for the global economy and oil demand growth.

Crude oil price movement over last 6 years

Source: EIA

As per EIA, Brent crude oil prices are expected to average $59 per barrel in 2015 and $75 per barrel in 2016, with annual average West Texas Intermediate prices expected to be $5 per barrel to $7 per barrel below Brent, according to EIA forecast. We expect the WTI at $52 in 2015, $62 in 2016, $72 in 2017 and $82 in 2018.

Oil companies have been impacted by falling prices. All the major E&P companies like Exxon Mobile, Chevron, and ConocoPhillips have reported significant drop in the last quarter profits. North Dakota’s Department of Mineral Resources says the state’s producers need a wellhead price of around $55-‐$65 to sustain current output of 1.2m barrels per day.

INDUSTRY TRENDS

E&P companies announcing significant capex cuts

Many large oil production and exploration companies have announced the capex cuts for 2015 to the tune of 20-‐25% of their earlier budgets. It is expected that if the prices remains at current level for next 2 quarters, these companies will announce further capex cuts as at current oil price, the production becomes economically unviable in most parts of the USA.

Rapid closure of active drilling rigs

Rigs across the US are being deactivated at a rapid rate. Over last one year, the total active rigs in North American have declined by 47% to 1087 currently. The drop in oil

rigs gas been sharper with active oilrigs count declining by 50% over last year.

Active drilling rigs count in North America

Source: Baker Hughes

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2161224

4

1517310

Year Ago

This Week

139

15361367478826

12450

4278

2227

This Week

956

3828

1257

22277040

2642889

UticaWilliston

MississippianPermian

HaynesvilleMarcellus

FayettevilleGranite Wash

DJ-NiobraraEagle Ford

BarnettCana Woodford

Ardmore WoodfordArkoma Woodford

Major Basin Variances

West VirginiaWyoming

TexasUtah

OklahomaPennsylvania

North DakotaOhio

LouisianaNew Mexico

ColoradoKansas

ArkansasCalifornia

Alaska

Major State Variances

35185

71536

4279

961

54220

2431

97

Year Ago

2649

88427

19254

17834

10891

6227

1141

10

Year Ago

Page 10

Focus shifting on Horizontal/directional drilling; Legacy fleet impacted the most

Over the past many years, focus of oil and gas exploration and production companies is shifting towards horizontal/directional drilling versus vertical drilling. Further, the usage of mechanical and SCR drilling is going down and that of AC rigs are going up. In the current downturn, the legacy fleet of mechanical and SCR rigs have been impacted more compared to fleet of AC rigs.

Percentage of active USA rigs


Count of active rigs by rig type


MARKETS AND COMPETITION

The oil and gas field services industry is a large industry consisting many diversified service providers and niche service providers. The industry generated total revenue of US$96B with profit of US$12B in latest financial year. According to industry estimates, the industry has growth at a rate of 0.3% CAGR over past 5 years. The industry is expected to see ~17% decline in revenue in 2015 due to decline in oil prices.

Highly fragmented industry

Oil & Gas field services industry is fragmented with top 3 players holding 32% market share. These three companies are Halliburton Company (11.8% market share), Schlumberger Ltd (10.7% market share) and Baker Hughes Inc. (9.5% market share). Concentration is particularly low among companies that supply support services for oil drilling and gas extraction on land. Conversely, concentration is higher in the offshore oil and gas extraction services segment, because these services have greater capital requirements.

Market Share Data of Key Players

Source: www.IBISWORLD.com

Though global companies like Schlumberger and Halliburton dominate the industry, there are many small companies in the industry that operate successfully. The largest operators in the industry have the advantage of working on a wide variety of projects across the globe, which has provided them with experience that smaller companies typically lack in managing a range of projects. Smaller companies can provide similar services, but they typically do not have the capital or scale to manage the largest projects in the United States. Oil drilling services is single largest sub segment of oil and gas field services with revenue share of 22%.

USA Oil and Gas Field Services industry sub segments


Halliburton+Company,+11.8%+ Schulmberger+

Ltd,+10.7%+

Baker+Hughes+Inc,+9.5%+

Nabors,+3.20%+

Helmerich+&+Payne,+2.4%+

PTEN,+2.4%+

Others,+60.0%+

Page 11

Highly cyclical nature of the industry

Like energy sector, Oil & Gas field services industry is cyclical over a long term. Ultimately, the industry is clearly dependent on commodity cycles. However, the industry is highly volatile and sensitive to the short-‐term changes in oil prices.


Competition is fierce

Competition in this industry is high because companies all provide similar services and must therefore compete on price and quality. Competition for contracts is fierce in the industry, as upstream oil and gas companies typically rely on the largest operators for complex and large oil and gas field projects. As a result, small scale and regional companies must compete for available projects. Fortunately for these smaller companies, the emergence of hydraulic fracturing and horizontal drilling techniques has spurred high levels of production and investment in oil and gas field services. Consequently, the number of industry operators has increased at an annualized rate of 2.9% to 11,848, as companies have entered the industry.

Contracts secured by industry companies are largely awarded on a competitive bid basis. Price competition is often the primary factor in determining which contractor is awarded a contract, although quality of service, operational and safety performance, equipment suitability and availability, location of equipment, reputation and technical expertise are also factors. These non-‐ price factors depend on skill levels within an organization. In the area of oil and gas well servicing, an important competitive factor in establishing and maintaining long-‐term customer relationships is having an experienced, skilled and well-‐trained workforce.

Industry consolidation taking place due to recent downturn in industry

There has been some industry consolidation over the past five years, with the merger of Smith International and Schlumberger being the most significant in this industry. Decreasing downstream demand, driven by low natural gas prices, has also put pressures on industry players to consolidate and improve operating efficiency. In November 2014, Halliburton announced plans to acquire its competitor, Baker Hughes, for $34.6 billion. This acquisition would drastically alter the global landscape of oil and gas field service companies. Halliburton cited its need to better compete with Schlumberger as a primary reason for acquiring Baker Hughes, and their combined catalogs of technology, products and research and development projects will enable them to more aggressively compete in the industry. Consequently, small companies will have a difficult time competing for large-‐scale contracts. Nonetheless, small companies will still be able to acquire contracts for small-‐scale oil and gas extraction projects, as the largest operators typically only focus on the most complex and large-‐scale extraction projects.

Medium barriers to entry

Barriers to entry in the Oil and Gas Field Services industry vary depending on the services being provided. For example, simple exploration and geological services have fewer barriers than offshore drilling services. Overall, the level of barriers to entry into the industry is considered medium, mostly because small operators can participate in this industry by providing information, research and management services. Barriers to entry are very high for companies that provide comprehensive oil and gas drilling services. Work tends to be won by operators that offer not only competitive prices but also established track records, making it difficult for new entrants to establish themselves, particularly for contracts relating to ongoing well maintenance or life-‐of-‐mine management.

A brief profile of key players

Halliburton Company

Halliburton Company (HAL) is one of the world’s largest products and services provider to the energy sector. The company is headquartered in Houston and has 77,000 employees in about 80 countries. Halliburton serves the upstream oil and gas industry throughout the life cycle of a reservoir, from locating hydrocarbons and managing

Page 12

geological data to drilling and formation evaluation, well construction, completion and optimizing production.

The company operates through its completion and production segment and its drilling and evaluation segment.

Schlumberger Ltd

Schlumberger Limited (SLB) traces its origins to 1926, when it was founded as a metal ore prospecting company. The company has since grown to become the leading oilfield services company in the world, providing comprehensive drilling and well support services for oil, natural gas and mineral ore extractors. SLB’s USA headquarters are in Houston and its primary European offices are in Paris and The Hague. The company employs over 120,000 people in 85 countries. In 2013, the company generated $45.3 billion in total revenue.

SLB provides comprehensive oilfield services through three business segments: reservoir characterization, drilling and production.

Baker Hughes Inc.

Baker Hughes Incorporated (BHI) is a comprehensive oil and gas drilling services provider founded in 1987 as a result of a merger between Baker International and Hughes Tool Company. The company is headquartered in Houston and operates in several other markets across the world. Baker Hughes has about 60,000 employees serving customers in over 80 countries. The company provides drill technology, drilling services and drilling fluids to oil and gas extractors. BHI also offers well completion, production optimization and pressure pumping services. In 2013, BHI generated $22.4 billion in total revenue.

BHI’s products and services are segmented into two broad business segments: drilling and evaluation and completion and production.

A brief profile of other key players in USA drilling segment

Nabors Industries Ltd.

Nabors Industries Ltd. (NBR), together with its subsidiaries, provides drilling and rig services. The company offers rig instrumentation, optimization software, and directional drilling services. It also provides completion, life-‐of-‐well maintenance, and plugging and abandonment of a well. In addition, the company

markets approximately 466 land drilling rigs for oil and gas land-‐based drilling operations in the USA, Canada, and approximately 20 other countries worldwide; approximately 445 rigs for land well-‐servicing and workover services in the USA; 98 rigs for land well-‐servicing and workover services in Canada; 42 rigs for offshore drilling operations in the United States and internationally; and 7 jackup units and components of trucks and fluid hauling vehicles. NBR was founded in 1968 and is headquartered in Hamilton, Bermuda.

Patterson-‐UTI Energy Inc.

Patterson-‐UTI Energy Inc. (PTEN), through its subsidiaries, provides onshore contract drilling services to major and independent oil and natural gas operators in the USA and Canada. The company operates through three segments: Contract Drilling, Pressure Pumping, and Oil and Natural Gas. As of December 31, 2014, this segment had a drilling fleet of 239 marketable land-‐based drilling rigs. PTEN was founded in 1978 and is headquartered in Houston, Texas.

In October 2010, two subsidiaries of PTEN acquired key assets from Key Energy Pressure Pumping Services LLC and Key Electric Wireless Services LLC, both of which provide pressure pumping services and electric wireline services to customers in the oil and natural gas industry. This acquisition expanded PTEN’s pressure pumping operations to additional markets, primarily in Texas.

Peer Comparisons

Source: Bloomberg, Yahoo Finance

Source: Bloomberg, Yahoo Finance

We compared HP with the key players in the industry based on certain financial and valuation parameters in the tables above. We note that the financial and

Peer ComparisonTicker P/E EV/S P/B EV/EBITDA Div Yield (%)HP 12.0 2.1 1.6 7.2 3.9NBR NA 1.3 0.9 12.0 NAPTEN 12.9 1.3 1.0 4.0 1.9RIG NA 1.5 0.5 NA NANE NA 2.9 0.6 9.0 NA

(All the figures are in $BN unless otherwise stated)Ticker Mkt Cap Sales PAT RoE (%)HP 7.8 3.9 0.7 14.5NBR 4.3 6.8 -0.7 NAPTEN 3.0 3.2 0.2 5.8RIG 6.2 9.0 -1.9 NANE 4.0 3.2 -0.2 NA

Page 13

valuation parameters are not strictly comparable due to complex portfolio of business each of these players have and different weightage of each business in their portfolio.

We believe that HP is the best player in contract drilling segments based on financial and operational parameters. The company has most modern fleet of rigs and has superior profitability compared to peers.

However, we think that, all the players are likely to hit by the persistent downturn in the global oil prices and the dependence on USA oil production.

In the current situation, we prefer other large international players like HAL, SLB and BHI as these players have presence across geographies are not solely dependent on USA oil production to generate revenue. Due to their less dependence in USA oil production and strong financial position, we believe that they are better placed to sustain through the current industry downturn.

Source: SEC Filings of companies

ECONOMIC OUTLOOK

We believe that the key economic indicators for oil pipeline industry are the global demand and supply of oil and the global prices of oil. If the prices of oils drop globally, it results into reduced domestic production.

World oil production and consumption balance

Source: EIA Energy short-‐term outlook April 7, 2015

Give the low growth in fuel consumption growth over next 2 years and continuous production growth in Latin

America and OPEC countries will keep the world oil prices at below the cost of production of majority USA oilfields ($60-‐65) making things difficult for oil pipeline companies.

The forecast of decline in stock of crude oil inventory over next 2 years suggests that the production levels will at best maintained at current level if not curtailed.

Also the world oil demand and supply are expected to go hand in hand and unlikely to cause scarcity of oil. This indicates that oil prices are unlikely to go up in hurry. The oil prices below $55-‐60 range does not augur well for the growth of US oil production industry. We expect US oil production to decline by 10-‐15% over next 1 year.

US Crude oil Inventory

Source: EIA Energy short-‐term outlook April 7, 2015

Further, if the global GDP growth rate is higher, it augurs well for the demand of oil. However, World Bank report projects only incremental growth in world GDP and it is unlikely to result in significant demand for oil in medium term.

GDP Growth forecast for world

Source: World Bank, January 2015 Global economic prospects

Further interest rates are the key economic driver for this industry, as due to its high capital intensity, the higher

Rigs Fleet Summary Company US Land rigs Offshore rigs International Land rigsHP 337 9 36NBR 275 16 232PTEN 229 NA 10RIG NA 68 NANE NA 32 NA

Page 14

interest rates will increase the cost of capital for the companies in this industry.

World Bank expects the policy rates in the developed world to start going up from 2015 onwards. The interest rates in USA are expected to show steep rise in year 2016 compared to other developed countries. We expect 40bps increase in 10-‐year US treasury yield by the end of 2015. High capital-‐intensive industries including Oil Production and Exploration will probably find it difficult to undertake new projects limiting the production growth.

Government policy rates forecast

Source: World Bank, Bloomberg

CATALYSTS FOR GROWTH

The key value drivers for this industry are price of crude oil, production of oil, and demand of oil. Essentially, a lower demand of oil will result into lower oil prices, which in turn reduce the production of oil. Reduction in production of oil results into lower demand for oil and gas equipment and services industry. The prices of oil globally are not only decided by demand and supply economics, but other factors like political stability in major oil producing regions as well as international politics are other key important drivers of oil prices.

We believe that the industry is likely to slow down if the current low oil prices persist for longer period. The key catalyst for this industry to report reasonable growth would be continuous increase in production of oil by USA. This is only possibly if the global oil prices bounce back to about $80 per barrel over next 2 quarters. The increase in oil prices is possible over next few months if OPEC decides to cut its production to spruce up the prices.

Drivers of investment thesis

• With significant decline in oil prices over last six months, the production in most of the oil fields in the USA becomes economically unviable. We believe that the current low oil prices are likely to sustain in medium term thereby impacting the production of oil in USA. There has been significant decline in active rigs count over last 6 months. The active rigs have fallen from over 2000 last year to less than 1100 currently.

• Early termination of fixed rate drilling contracts, increasing number of idle rigs and more rigs operating on spot rates will impact the revenue and predictability of HP as spot drilling day rates have already declined by 10-‐20% last 3 months.

• The day rate and higher profitability of HP is at risk compared to last downturn as all major players in the industry have upgraded their rig fleets from mechanical rigs to AC rigs thereby increasing competition

Risks to investment thesis

• A sharp rise in oil prices to levels above $80-‐90/barrel in short term will benefit the company and improve its financials. A rebound in oil prices will sustain the US oil production at current levels thereby requiring the oil field services like drilling.

• A better than expected rigs demand, day rates and day margins will have positive impact on HP financials

VALUATION

Our investment thesis is the outcome of careful analysis of oil pipeline transportation industry, macro economic outlook and preparation of detailed financial modeling. In this part of the report we will explain you briefly about the key assumptions behind the financial model and investment thesis.

Key assumptions in financial model

Revenue to decline over next 2 years

We expect the revenue of HP to decline by 25% in FY15 and by 9% in FY16 primarily due to significant decline in active rigs, decline in day spot rate and early termination of fixed rate contracts by customers. The revenue from contract drilling segment are forecasted to decline by 25% yoy in FY15 led by 27% fall in revenue from USA land

Page 15

segment. We expect total working rigs to fall from 294 to 230 in FY15 and to 220 in FY16. Further, we estimate 8% and 5% reduction in average rig revenue per day in USA land segment in FY15 and FY16 respectively. We expect utilization of USA land rigs to fall from 86% in FY14 to 66% in FY15 and 61% in FY16.

Apart from USA land segment, we estimate 21% and 9% decline in international land segment in FY15 and FY16 respectively again led by reduction in active rigs from 30 in FY14 to 23 in FY15 and 21 in FY16 respectively. We expect average revenue per day in international segment to fall by 15% in FY15.

We forecast revenue growth to resume in FY17 due to increase in USA oil production and exploration activities. We expect terminal growth of 4.5% for HP from 2020.

Significant operating profit margin contraction

We estimate operating profit margins of HP to contract sharply over next 2 years primarily due to sharp decline in revenue and reduction in average rig margins per day across business segments. We are forecasting the operating profit margin of HP to go down from 28.4% in FY14 to 9.9% in FY17. We anticipate profit margins to start rising again from FY18 as demand picks up.

Capital expenditure to slow down substantially

Due to sharp decline in business activities we expect capital expenditure to start slowing down significantly from FY16. We are forecasting capex of US$1.1B in FY15 due to rigs order backlog as guided by the management of the company. However, we estimate that post FY15, the company will incur only maintenance capex over FY16 and FY17. We forecast the long-‐term debt to go up by US$500M due to capex requirements in FY15. However, we expect the company to have zero net debt by FY17.

We expect that total assets turnover ratios and fixed asset turnover ratio will fall in coming years due to lower revenue. We forecast fixed asset turnover ratio to fall from 0.8x in CY14 to 0.5x in CY17. Further, we expect ROIC to fall from 12% in FY14 to 2.6% in FY16.

Discounted Cash Flow/Economic Profit (DCF/EP)

The DCF/EP model generates a target price of $48.21. This model is based on a 4.5% CV growth rate discounted at a weighted average cost of capital (WACC) of 7.97%. This represents a 35% price discount to the closing price

on 4/20/15. The recent sell off in the energy sector was driven by a ~50% decline in WTI and Brent crude oil prices due to street sentiment regarding ongoing headwinds facing the global economy combined with record levels of crude oil production and supply. HP is expected to generate a negative EP for next 5 years based on our model.

Dividend Discount Model (DDM)

The DDM returned a current target price of $44, a 41% discount to the current market price and 8.5% lower than the DCF/EP model. HP has focused on returning value to shareholders through dividend increases as evidenced by over 1,000% increase in the last six years. Though the company is likely to see significant reduction in the net income, we believe that HP can continue to distribute current level of dividend due to significant lower capital expenditure requirements for next few years and reduction in absolute investment in working capital due to reduction in sales. We estimate the per share dividend to increase from current level of US$2.45 to US$3.2 in FY20. Although the DDM does not weigh heavily in deriving the target price range, it is important as it provides a level of reasonableness for our fundamental analysis and a potential price floor.

Relative valuation

We have compared HP with other oil & gas drilling companies like NBR, PTEN, RIG and NE. All these companies are major players in North America oil drilling industry. We understand that these companies are not strictly comparable with each other given their relative difference in size and business model. We have compared the valuation of these companies based on price/sales and price/book method, as most of these companies are expected to report negative earnings in FY15/FY16

The relative P/B model and P/S model returned a target price of $34 and $30 respectively in 2015. However, we believe that the target price arrived based on relative valuation does not differentiate many qualitative and quantitative differences factors. We believe that HP should trade at a 50% premium multiple to its peers given its superior balance sheet, historical growth and return ratios. So the target prices based on relative valuation works out to be $48/share.

Overall, we reference the DCF/EP valuation model in deriving our target price range as that valuation most accurately captures HP’s current operating profile and

Page 16

the underlying revenue growth components, including day rates, rig growth, and utilization rates. The DDM and Relative valuation models provide supporting evidence and may help substantiate assumptions used in our DCF analysis, but they do not heavily influence our target price range.

KEYS TO MONITOR

There is couple of key things to monitor for investors in this industry.

Global oil prices:

Oil price is the significant determinant of the performance of this industry in the medium term basis. Currently, the oil prices are multi year low. The movement of oil prices over next 2 quarters will be a key thing to monitor

Domestic production level of oil:

The performance of oil & gas equipment and services industry is directly related to the domestic oil production levels.

REFERENCES

1) “Short-‐term Energy Outlook”, U.S. Energy Information Administration, April 17, 2015 http://www.eia.gov/forecasts/steo/

2) “Effect of declining crude oil prices on U.S. production” http://www.eia.gov/todayinenergy/detail.cfm?id=19171

3) IBISWorld – U.S. Industry Reports – Oil & Gas Field Services

4) Bloomberg – Historical Volatility, Beta, Relative Valuation

5) Factset 6) Company fillings of HP, PTEN, NBR, BHI, SLB, BHI,

HAL 7) Baker Hughes 8) www.yahoofinance.com 9) HP 1QFY15 Earnings Transcript

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management.

These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

Page 17

Hemlerich)PayneRevenue&Decomposition

Fiscal'Years'Ending'Sep.'30

Revenue ModelContract drilling % of Total Sales % change US Land % change International Land % change Argentina % change Columbia % change Ecuador % change Other % change Total Land % of Contract drilling sales % change US Offshore % of Contract drilling sales % change

Others % of Total Sales % change

2012 2013

3,137.6 3,374.299.5% 99.6%24.1% 7.5%

2,678.5 2,785.427.5% 4.0%270.0 366.8

19.0% 35.9%54.3 73.2

22.9% 34.8%82.2 100.1

10.3% 21.8%56.4 67.9

32.4% 20.4%77.1 125.6

17.7% 62.9%2949 315294.0% 93.4%26.7% 6.9%189.1 221.96.0% 6.6%

-6.1% 17.3%

14.2 13.50.5% 0.4%

-6.0% -5.3%

2014 2015E 2016E 2017E 2018E 2019E 2020E

3,706.3 2,775.1 2,522.1 2,956.6 3,345.5 3,660.5 3,824.799.6% 99.5% 99.4% 99.5% 99.5% 99.6% 99.6%

9.8% -25.1% -9.1% 17.2% 13.2% 9.4% 4.5%3,100.0 2,272.2 2,064.7 2,463.6 2,814.4 3,116.0 3,266.8

11.3% -26.7% -9.1% 19.3% 14.2% 10.7% 4.8%355.5 280.4 256.1 281.7 309.2 322.6 336.1-3.1% -21.1% -8.7% 10.0% 9.8% 4.3% 4.2%107.9 80.9 72.8 85.9 98.8 107.7 116.3

47.4% -25.0% -10.0% 18.0% 15.0% 9.0% 8.0%85.2 59.6 53.7 61.2 69.1 74.7 78.4

-14.9% -30.0% -10.0% 14.0% 13.0% 8.0% 5.0%69.2 48.4 43.6 50.1 55.1 58.5 61.4

1.9% -30.0% -10.0% 15.0% 10.0% 6.0% 5.0%93.2 91.4 85.9 84.4 86.1 81.8 79.9

-25.8% -1.9% -6.0% -1.8% 2.0% -5.0% -2.2%3455 2553 2321 2745 3124 3439 360393.2% 92.0% 92.0% 92.9% 93.4% 93.9% 94.2%9.6% -26.1% -9.1% 18.3% 13.8% 10.1% 4.8%

250.8 222.5 201.3 211.3 221.9 221.9 221.96.8% 8.0% 8.0% 7.1% 6.6% 6.1% 5.8%

13.0% -11.3% -9.5% 5.0% 5.0% 0.0% 0.0%

13.4 14.8 15.0 15.3 15.7 16.0 16.70.4% 0.5% 0.6% 0.5% 0.5% 0.4% 0.4%

-0.4% 10.0% 2.0% 2.0% 2.0% 2.0% 4.5%

Total Revenues % change

US)Land)OperationsRevenue'daysAverage'rig'revenue'per'day'US$Average'rig'expenses'per'dayAverage'rig'margin'per'day

3152 338823.9% 7.5%

86340 8862027737 2838213022 1302914715 15353

3720 2790 2537 2972 3361 3676 38419.8% -25.0% -9.1% 17.1% 13.1% 9.4% 4.5%

100638 83950 80300 91250 102200 113150 11862528194 27066 25713 26999 27539 27539 2753913058 14074 13628 13769 14045 14045 1404515136 12992 12085 13229 13494 13494 13494

UtilizationRigs'at'the'end'of'year

88.9% 82.3%282 302

86.4% 65.7% 61.1% 69.4% 77.8% 84.9% 87.8%329 360 360 360 360 370 380

Rigs'count'based'on'revenue 264.6 268.9 301.2 230 220 250 280 310 325

US)Offshore)OperationsRevenue'daysAverage'rig'revenue'per'day'US$Average'rig'expenses'per'dayAverage'rig'margin'per'day

2625 292053927 6106933051 3765420876 23415

2920 3000 3000 3000 3000 3000 300063094 58046 55144 57901 60796 60796 6079637653 38311 36947 37636 38302 38302 3830225441 19736 18198 20265 22495 22495 22495


79.9% 88.9%9 9

88.9% 91.3% 91.3% 91.3% 91.3% 91.3% 91.3%9 9 9 9 9 9 9

Rigs'count'based'on'revenue 9.6 10.0 10.9 10.5 10 10 10 10 10

International)OperationsRevenue'daysAverage'rig'revenue'per'day'US$Average'rig'expenses'per'dayAverage'rig'margin'per'day

7343 870732998 3724625524 275897474 9657

8303 8395 7665 8030 8395 8760 912537117 33405 33405 35076 36829 36829 3682927278 25054 25054 25254 26517 26517 265179839 8351 8351 9821 10312 10312 10312


77.4% 82.3%29 29

75.8% 76.7% 70.0% 73.3% 76.7% 80.0% 83.3%36 36 36 36 36 36 36

Rigs'count'based'on'revenue 22.4 27.0 26.2 23 21 22 23 24 25

Page 18

Hemlerich)PayneIncome'Statement

Fiscal'Years'Ending'Sep.'30 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Total Revenue - Costs of Goods and Services - Depreciation and AmortizationGross Profit - SG&A expenses - R&D expenses - Other operating expensesOperating Income - Interest Expense - Foreign Exchange Losses (Gains) - Net Non-Operating Losses (Gains)Pretax Income - Income Tax Expense - Deffered Income Tax ExpenseIncome Before XO Items - Extraordinary Loss Net of Tax - Minority InterestsNet Income - Other Adjustments

3,151.8 3,387.61,750.5 1,852.8

387.5 455.61,013.7 1,079.2

107.3 126.316.1 15.2

-19.2 -18.9909.6 956.7

7.3 4.50.0 0.0

-0.3 -162.1902.6 1,114.3132.0 363.3196.9 29.6573.6 721.5

-7.4 -15.20.0 0.0

581.0 736.60.0 3.8

3,719.7 2,789.9 2,537.1 2,972.0 3,361.2 3,676.5 3,841.42,009.9 1,646.0 1,522.3 1,735.6 1,949.5 2,132.4 2,228.0

523.5 560.9 639.0 658.0 693.0 714.0 745.81,186.2 583.0 375.9 578.3 718.7 830.1 867.6

135.1 120.0 126.9 133.7 144.5 147.1 134.415.9 13.9 12.7 14.9 16.8 18.4 19.2

-19.6 -16.7 -15.2 -17.8 -20.2 -22.1 -23.01,054.8 465.8 251.5 447.6 577.5 686.8 737.0

3.1 1.2 10.6 14.4 11.4 8.4 8.40.0 0.0 0.0 0.0 0.0 0.0 0.0

-44.6 0.0 0.0 0.0 0.0 0.0 0.01,096.3 464.6 240.9 433.2 566.1 678.4 728.6

360.4 153.3 79.5 143.0 186.8 223.9 240.427.1 11.6 6.0 10.8 14.2 17.0 18.2

708.8 299.7 155.4 279.4 365.2 437.5 469.90.0 0.0 0.0 0.0 0.0 0.0 0.00.0 0.0 0.0 0.0 0.0 0.0 0.0

708.8 299.7 155.4 279.4 365.2 437.5 469.94.1 0.0 0.0 0.0 0.0 0.0 0.0

Net Inc Avail to Common Shareholders

Abnormal Losses (Gains) Tax Effect on Abnormal ItemsNormalized Income

581.0 732.8

-31.8 -189.711.1 66.4

552.9 598.2

704.7 299.7 155.4 279.4 365.2 437.5 469.9

-72.425.4

661.7 299.7 155.4 279.4 365.2 437.5 469.9

Basic Adjusted EPS 5.18 5.63 6.14 2.78 1.44 2.59 3.38 4.05 4.35No)of)Shares)outstandingDividend)Per)ShareDividend)Payment

Cost0of0good0sold/RevenueDepreciation/Opening0PPE0balanceSG&A0Expenses/RevenueR&D0Expenses/RevenueOther0operating0Expenses/RevenueOperating)Profit)marginInterest0expense/opening0debt0balance

Income0Tax/Pretax0IncomeDeffered0Tax/Pretax0Income

106.8 106.30.28 0.88M30.0 M93.1

0.313 0.087

55.5% 54.7%7.3% 7.2%3.4% 3.7%0.5% 0.4%M0.6% M0.6%28.9% 28.2%2.1% 1.9%

14.6% 32.6%21.8% 2.7%

107.8 108.0 108.0 108.0 108.0 108.0 108.02.45 2.30 2.50 2.60 2.90 3.00 3.20

M264.4 M248 M270 M281 M313 M324 M346

0.091 M0.548 M0.481 0.798 0.307 0.198 0.074

54.0% 59.0% 60.0% 58.4% 58.0% 58.0% 58.0%7.5% 7.1% 7.1% 7.0% 7.0% 6.8% 6.6%3.6% 4.3% 5.0% 4.5% 4.3% 4.0% 3.5%0.4% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%M0.5% M0.6% M0.6% M0.6% M0.6% M0.6% M0.6%28.4% 16.7% 9.9% 15.1% 17.2% 18.7% 19.2%1.6% 1.5% 2.0% 3.0% 3.0% 3.0% 3.0%

32.9% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0%2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Page 19

Hemlerich)PayneBalance'Sheet

Fiscal'Years'Ending'Sep.'30

Assets Cash & Near Cash Items Short-Term Investments Accounts & Notes Receivable Inventories Other Current AssetsTotal Current Assets LT Investments & LT Receivables Net Fixed Assets Gross Fixed Assets (-) Accumulated Depreciation Other Long-Term Assets

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

96.1 447.9 360.9 215.0 219.2 315.3 315.7 264.8 219.30.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

620.5 621.4 705.2 558.0 532.8 594.4 638.6 680.1 768.378.8 88.9 106.2 97.6 88.8 101.0 107.6 117.6 122.999.9 100.1 105.0 83.7 76.1 89.2 100.8 110.3 115.2

895.2 1,258.2 1,277.4 954.3 916.9 1,099.9 1,162.7 1,172.9 1,225.8451.1 316.2 236.6 236.6 236.6 236.6 236.6 236.6 236.6

4,351.6 4,676.1 5,188.5 5,727.7 5,488.7 5,330.7 5,237.7 5,323.7 5,377.96,306.1 7,020.9 7,899.8 8,999.8 9,399.8 9,899.8 10,499.8 11,299.8 12,099.81,954.5 2,344.8 2,711.3 3,272.2 3,911.2 4,569.1 5,262.1 5,976.1 6,721.9

23.1 14.4 19.3 19.3 19.3 19.3 19.3 19.3 19.3Total Long-Term AssetsTotal Assets

Liabilities & Shareholders' Equity Accounts Payable Short-Term Borrowings Other Short-Term LiabilitiesTotal Current Liabilities Long-Term Borrowings Other Long-Term LiabilitiesTotal Long-Term LiabilitiesTotal Liabilities Share Capital & APIC Treasury Stock Retained earnings Other EquityTotal EquityTotal Liabilities & Equity

ASSETSAccounts3receivable/RevenueInventory/RevenueOther3current3assets/RevenueCapex

4,374.7 4,690.5 5,207.9 5,747.0 5,508.0 5,350.0 5,257.0 5,343.0 5,397.25,721.1 6,264.8 6,721.9 6,937.9 6,661.6 6,686.5 6,656.3 6,752.5 6,859.6

336.0 334.1 464.3 306.9 266.4 297.2 336.1 367.6 384.140.0 115.0 40.0 40.0 90.0 90.0 90.0 90.0 90.0

5.1 3.2 3.2 2.8 2.5 3.0 3.4 3.7 3.8381.2 452.3 507.5 349.7 358.9 390.2 429.5 461.3 478.0195.0 80.0 40.0 490.0 390.0 290.0 190.0 190.0 190.0

1,309.9 1,288.8 1,283.4 1,115.9 1,014.8 1,069.9 1,008.4 919.1 845.11,504.9 1,368.8 1,323.4 1,605.9 1,404.8 1,359.9 1,198.4 1,109.1 1,035.11,886.1 1,821.1 1,830.9 1,955.6 1,763.8 1,750.1 1,627.8 1,570.4 1,513.1

247.0 299.6 395.0 395.0 395.0 395.0 395.0 395.0 395.084.1 91.1 113.0 113.0 113.0 113.0 113.0 113.0 113.0

3,505.3 4,102.7 4,525.8 4,577.1 4,462.6 4,461.3 4,513.3 4,626.9 4,751.4166.81 132.53 83.13 123.1 153.1 193.1 233.1 273.1 313.1

3,835.0 4,443.7 4,891.0 4,982.3 4,897.8 4,936.4 5,028.5 5,182.1 5,346.55,721.1 6,264.8 6,721.9 6,937.9 6,661.6 6,686.5 6,656.3 6,752.5 6,859.6

19.7% 18.3% 19.0% 20.0% 21.0% 20.0% 19.0% 18.5% 20.0%2.5% 2.6% 2.9% 3.5% 3.5% 3.4% 3.2% 3.2% 3.2%3.2% 3.0% 2.8% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

$965.04 $714.82 $878.91 $1,100.00 $400.00 $500.00 $600.00 $800.00 $800.00

LIABILITIESAccounts3payable/RevenueOther3current3liabilities/RevenueOther3long3term3liabilities/Revenue

10.7% 9.9% 12.5% 11.0% 10.5% 10.0% 10.0% 10.0% 10.0%0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%

41.6% 38.0% 34.5% 40.0% 40.0% 36.0% 30.0% 25.0% 22.0%

Page 20

Hemlerich)PayneCash%Flow%Statement

Fiscal%Years%Ending%Sep.%30

Cash From Operating Activities + Net Income + Depreciation & Amortization + Other Non-Cash Adjustments + Changes in Non-Cash Capital Accounts & Notes Receivable Inventories Other Current Assets Accounts Payable Other Short-Term Liabilities + Income from discontinued operationsCash From Operations

Cash From Investing Activities + Disposal of Fixed Assets + Capital Expenditures + Increase in LT Inv + Net cash from discontinued operations + Other Investing ActivitiesCash From Investing Activities

Cash from Financing Activities + Dividends Paid + Change in Short-Term Borrowings + Increase in Long-Term Borrowings + Change in Minority Interest + Increase in Capital Stocks +Other changes in retained earnings + Other Financing ActivitiesCash from Financing ActivitiesNet Changes in Cash

Beginning)Cash)BalanceEnding)Cash)Balance

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

581.0 736.6 708.7 299.7 155.4 279.4 365.2 437.5 469.9387.5 455.6 523.5 560.9 639.0 658.0 693.0 714.0 745.8194.2 -140.9 -21.2

-155.0 -39.2 -92.5 19.3 0.9 -55.7 -23.1 -29.2 -81.7147.2 25.2 -61.6 -44.2 -41.5 -88.1

8.6 8.8 -12.2 -6.5 -10.1 -5.321.3 7.6 -13.0 -11.7 -9.5 -4.9

-157.4 -40.5 30.8 38.9 31.5 16.5-0.4 -0.3 0.4 0.4 0.3 0.2

-7.5 -15.0 0.01,000.3 997.2 1,118.5 879.8 795.3 881.7 1,035.0 1,122.3 1,134.0

39.9 28.0 30.8-1,097.7 -809.1 -952.9 -1,100.0 -400.0 -500.0 -600.0 -800.0 -800.0

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.07.5 15.0 0.0 0.0 0.0 0.0 0.0 0.0 0.00.0 232.2 49.2 0.0 0.0 0.0 0.0 0.0 0.0

-1,050.3 -533.8 -872.9 -1,100.0 -400.0 -500.0 -600.0 -800.0 -800.0

-30.0 -93.1 -264.4 -248.3 -269.9 -280.7 -313.1 -323.9 -345.5-115.0 0.0 0.0 0.0 50.0 0.0 0.0 0.0 0.0

0.0 -40.0 -115.0 450.0 -100.0 -100.0 -100.0 0.0 0.00.0 0.0 0.0 0.0 0.0 0.0

-71.6 23.1 49.9 40.0 30.0 40.0 40.0 40.0 40.00.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

-1.5 -1.7 -3.0 -167.4 -101.1 55.1 -61.6 -89.2 -74.0-218.2 -111.6 -332.6 74.2 -391.0 -285.7 -434.7 -373.2 -379.5-268.2 351.8 -87.0 -145.9 4.2 96.1 0.4 -50.9 -45.5

364.3 96.1 447.9 360.9 215.0 219.2 315.3 315.7 264.896.1 447.9 360.9 215.0 219.2 315.3 315.7 264.8 219.3

Page 21

Hemlerich)PayneCommon%Size%Income%Statement


Total Revenue - Purchase and related costs - Depreciation and AmortizationGross Profit - SG&A Expenses - R&D Expenses - Other operating ExpensesOperating Income - Interest Expense - Foreign Exchange Losses (Gains) - Net Non-Operating Losses (Gains)Pretax Income - Income Tax Expense - Deffered Income Tax ExpenseIncome Before XO Items - Extraordinary Loss Net of Tax - Minority InterestsNet Income - Other adjustmentsNet Inc Avail to Common Shareholders

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%55.54% 54.69% 54.03% 59.00% 60.00% 58.40% 58.00% 58.00% 58.00%12.30% 13.45% 14.08% 20.10% 25.19% 22.14% 20.62% 19.42% 19.41%32.16% 31.86% 31.89% 20.90% 14.81% 19.46% 21.38% 22.58% 22.59%3.40% 3.73% 3.63% 4.30% 5.00% 4.50% 4.30% 4.00% 3.50%0.51% 0.45% 0.43% 0.50% 0.50% 0.50%

-0.61% -0.56% -0.53% -0.60% -0.60% -0.60%28.86% 28.24% 28.36% 16.70% 9.91% 15.06% 17.18% 18.68% 19.19%0.23% 0.13% 0.08% 0.04% 0.42% 0.48% 0.34% 0.23% 0.22%0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

-0.01% -4.79% -1.20% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%28.64% 32.89% 29.47% 16.65% 9.50% 14.58% 16.84% 18.45% 18.97%4.19% 10.72% 9.69% 5.50% 3.13% 4.81% 5.56% 6.09% 6.26%6.25% 0.87% 0.73% 0.42% 0.24% 0.36% 0.42% 0.46% 0.47%

18.20% 21.30% 19.05% 10.74% 6.13% 9.40% 10.86% 11.90% 12.23%-0.24% -0.45% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

18.44% 21.75% 19.05% 10.74% 6.13% 9.40% 10.86% 11.90% 12.23%0.00% 0.11% 0.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

18.44% 21.63% 18.94% 10.74% 6.13% 9.40% 10.86% 11.90% 12.23%

Page 22

Hemlerich)PayneCommon%Size%Balance%Sheet



2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

1.68% 7.15% 5.37% 3.10% 3.29% 4.72% 4.74% 3.92% 3.20%0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

10.85% 9.92% 10.49% 8.04% 8.00% 8.89% 9.59% 10.07% 11.20%1.38% 1.42% 1.58% 1.41% 1.33% 1.51% 1.62% 1.74% 1.79%1.75% 1.60% 1.56% 1.21% 1.14% 1.33% 1.51% 1.63% 1.68%

15.65% 20.08% 19.00% 13.75% 13.76% 16.45% 17.47% 17.37% 17.87%7.89% 5.05% 3.52% 3.41% 3.55% 3.54% 3.56% 3.50% 3.45%

76.06% 74.64% 77.19% 82.56% 82.39% 79.72% 78.69% 78.84% 78.40%110.23% 112.07% 117.52% 129.72% 141.11% 148.06% 157.74% 167.34% 176.39%34.16% 37.43% 40.34% 47.16% 58.71% 68.33% 79.05% 88.50% 97.99%

0.40% 0.23% 0.29% 0.28% 0.29% 0.29% 0.29% 0.29% 0.28%Total Long-Term AssetsTotal Assets

Liabilities & Shareholders' Equity Accounts Payable Short-Term Borrowings Other Short-Term LiabilitiesTotal Current Liabilities Long-Term Borrowings Other Long-Term LiabilitiesTotal Long-Term LiabilitiesTotal Liabilities Total Preferred Equity Minority Interest Share Capital & APIC Retained Earnings & Other EquityTotal EquityTotal Liabilities & Equity

76.47% 74.87% 77.48% 82.83% 82.68% 80.01% 78.98% 79.13% 78.68%100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

5.87% 5.33% 6.91% 4.42% 4.00% 4.44% 5.05% 5.44% 5.60%0.70% 1.84% 0.60% 0.58% 1.35% 1.35% 1.35% 1.33% 1.31%0.09% 0.05% 0.05% 0.04% 0.04% 0.04% 0.05% 0.05% 0.06%6.66% 7.22% 7.55% 5.04% 5.39% 5.84% 6.45% 6.83% 6.97%3.41% 1.28% 0.60% 7.06% 5.85% 4.34% 2.85% 2.81% 2.77%

22.90% 20.57% 19.09% 16.08% 15.23% 16.00% 15.15% 13.61% 12.32%26.30% 21.85% 19.69% 23.15% 21.09% 20.34% 18.00% 16.43% 15.09%32.97% 29.07% 27.24% 28.19% 26.48% 26.17% 24.46% 23.26% 22.06%4.32% 4.78% 5.88% 5.69% 5.93% 5.91% 5.93% 5.85% 5.76%1.47% 1.45% 1.68% 1.63% 1.70% 1.69% 1.70% 1.67% 1.65%

61.27% 65.49% 67.33% 65.97% 66.99% 66.72% 67.80% 68.52% 69.27%2.92% 2.12% 1.24% 1.77% 2.30% 2.89% 3.50% 4.04% 4.56%

67.03% 70.93% 72.76% 71.81% 73.52% 73.83% 75.54% 76.74% 77.94%100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Page 23

Hemlerich)PayneCommon%Size%Balance%Sheet



2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

3.05% 13.22% 9.70% 7.71% 8.64% 10.61% 9.39% 7.20% 5.71%0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

19.69% 18.34% 18.96% 20.00% 21.00% 20.00% 19.00% 18.50% 20.00%2.50% 2.62% 2.86% 3.50% 3.50% 3.40% 3.20% 3.20% 3.20%3.17% 2.95% 2.82% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%

28.40% 37.14% 34.34% 34.21% 36.14% 37.01% 34.59% 31.90% 31.91%14.31% 9.33% 6.36% 8.48% 9.33% 7.96% 7.04% 6.44% 6.16%

138.07% 138.04% 139.49% 205.30% 216.33% 179.37% 155.83% 144.80% 140.00%200.08% 207.25% 212.38% 322.59% 370.49% 333.11% 312.38% 307.35% 314.98%62.01% 69.22% 72.89% 117.29% 154.16% 153.74% 156.56% 162.55% 174.98%

0.73% 0.42% 0.52% 0.69% 0.76% 0.65% 0.57% 0.53% 0.50%Total Long-Term AssetsTotal Assets

Liabilities & Shareholders' Equity Accounts Payable Short-Term Borrowings Other Short-Term LiabilitiesTotal Current Liabilities Long-Term Borrowings Other Long-Term LiabilitiesTotal Long-Term LiabilitiesTotal Liabilities Total Preferred Equity Minority Interest Share Capital & APIC Retained Earnings & Other EquityTotal EquityTotal Liabilities & Equity

138.80% 138.46% 140.01% 205.99% 217.10% 180.02% 156.40% 145.33% 140.50%181.52% 184.93% 180.71% 248.68% 262.56% 224.99% 198.03% 183.67% 178.57%

10.66% 9.86% 12.48% 11.00% 10.50% 10.00% 10.00% 10.00% 10.00%1.27% 3.39% 1.08% 1.43% 3.55% 3.03% 2.68% 2.45% 2.34%0.16% 0.09% 0.09% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%

12.09% 13.35% 13.64% 12.53% 14.15% 13.13% 12.78% 12.55% 12.44%6.19% 2.36% 1.08% 17.56% 15.37% 9.76% 5.65% 5.17% 4.95%

41.56% 38.05% 34.50% 40.00% 40.00% 36.00% 30.00% 25.00% 22.00%47.75% 40.41% 35.58% 57.56% 55.37% 45.76% 35.65% 30.17% 26.95%59.84% 53.76% 49.22% 70.10% 69.52% 58.89% 48.43% 42.72% 39.39%7.84% 8.84% 10.62% 14.16% 15.57% 13.29% 11.75% 10.74% 10.28%2.67% 2.69% 3.04% 4.05% 4.45% 3.80% 3.36% 3.07% 2.94%

111.22% 121.11% 121.67% 164.06% 175.89% 150.11% 134.28% 125.85% 123.69%5.29% 3.91% 2.23% 4.41% 6.04% 6.50% 6.94% 7.43% 8.15%

121.68% 131.18% 131.49% 178.59% 193.04% 166.10% 149.60% 140.95% 139.18%181.52% 184.93% 180.71% 248.68% 262.56% 224.99% 198.03% 183.67% 178.57%

Page 24

Hemlerich)PayneValue&Driver&Estimation

Fiscal&Years&Ending&Sep.&30

Operating*RevenueLess*COGS*(excl*depr*&*amort)Less*depreciation*&*amortizationLess*SG&A*and*other*costsPlus*implied*interest*on*operating*leasesEBITA

Less*Adjusted*Taxes:Marginal*Tax*Rate*Provision*for*income*taxesPlus*tax*shield*on*unusual*expensePlus*tax*shield*on*implied*lease*interest*expPlus*tax*shield*on*interest*expense

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

3152 3388 3720 2790 2537 2972 3361 3676 38411751 1853 2010 1646 1522 1736 1949 2132 2228388 456 524 561 639 658 693 714 746104 123 131 117 124 131 141 143 1311 1 1 1 1 2 2 2 2

910 958 1056 467 253 449 579 688 739

35% 35% 35% 35% 35% 35% 35% 35% 35%329 393 388 165 86 154 201 241 2590 0 0 0 0 0 0 0 00 0 0 0 1 1 1 1 13 2 1 0 4 5 4 3 3

Less*tax*shield*on*nonoperating*incomeTotal*Adjusted*Taxes

Deferred*Tax*LiabilityDeferred*Tax*AssetPlus:*Change*in*Deferred*TaxesNOPLAT

Invested)CapitalOperating*Current*Assets

Cash*(make*sure*not*excess)Trade*&*other*receivables,*netInventoryOther*current*assets

Total*operating*current*assetsOperating*Liabilities

Accounts*payableIncome*tax*payableAccrued*PayrollMiscellaneous*Current*Liabilities

Total*operating*current*liabilities

Net)Operating)Working)CapitalPlus:*Net*PPEPlus:*PV*of*operating*leasesPlus:*Net*intangible*assets,*excluding*g/wLess:*Other*operating*liabilitiesInvested)Capital)(IC)

Value)DriversReturn)on)Invested)Capital)(ROIC)CY*NOPLATPY*Invested*CapitalROIC

Free)Cash)Flow)(FCF)CY*NOPLATCY*Invested*CapitalPY*Invested*CapitalFCF

Economic)Profit)(EP)PY*Invested*CapitalROICWACCEP

0 57 16 0 0 0 0 0 0332 338 373 166 90 159 206 244 262

1,209.0 1,223.0 1,215.3 1227 1233 1244 1258 1275 129317.6 16.4 16.5 16.5 16.5 16.5 16.5 16.5 16.5236 15 ]8 12 6 11 14 17 18815 635 675 313 169 301 388 461 495

96 448 361 215 219 315 316 265 219620 621 705 558 533 594 639 680 76879 89 106 98 89 101 108 118 123100 100 105 84 76 89 101 110 115895 1258 1277 954 917 1100 1163 1173 1226

336 334 464 307 266 297 336 368 384

5 3 3 3 3 3 3 4 4341 337 468 310 269 300 339 371 388

554 921 810 645 648 800 823 802 8384352 4676 5189 5728 5489 5331 5238 5324 537828 27 32 37 39 41 43 46 50

4933 5624 6031 6409 6175 6171 6104 6172 6265

815 635 675 313 169 301 388 461 4954352 4933 5624 6031 6409 6175 6171 6104 617218.7% 12.9% 12.0% 5.2% 2.6% 4.9% 6.3% 7.6% 8.0%

815 635 675 313 169 301 388 461 4954933 5624 6031 6409 6175 6171 6104 6172 62654352 4933 5624 6031 6409 6175 6171 6104 6172

))))))))))))))234) ))))))))))))))(56) ))))))))))))))268) ))))))))))))))(66) ))))))))))))))403) ))))))))))))))305) ))))))))))))))455) ))))))))))))))393) ))))))))))))))401)

4352 4933 5624 6031 6409 6175 6171 6104 617218.7% 12.9% 12.0% 5.2% 2.6% 4.9% 6.3% 7.6% 8.0%8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

))))))))))))))468) ))))))))))))))241) ))))))))))))))226) ))))))))))))(168) ))))))))))))(342) ))))))))))))(192) ))))))))))))(104) ))))))))))))))(26) )))))))))))))))))3)

Page 25

Hemlerich)PayneWeighted(Average(Cost(of(Capital((WACC)(Estimation

Equity DebtShares'outstanding'(Mn) 108'''''''''' Book'value'of'debt'(ST'&'LT) 530''''''''''Price'per'share 68.21''''''' Increase'in'FV'of'debt

Operating'leases 32''''''''''''Market'value'equity 7,353''''''' Total'debt 562''''''''''

Weight'of'equity 0.93''''''''' Weight'of'debt 0.07'''''''''

Beta'(3'year) 1.17''''''''' Cost'of'debt,'preQtax 4.00%Risk'free'rate'(30Qyr'US'TQBond)'as'of'2/25/15 2.71%Market'risk'premium'(1928Q2013'TQBond) 4.85% Marginal'Tax'rate 35.00%Cost)of)Equity)by)CAPM)Model 8.38% After)tax)cost)of)debt 2.60%

WACC 7.97%

Page 26

Hemlerich)PayneDiscounted+Cash+Flow+(DCF)+and+Economic+Profit+(EP)+Valuation+Models

Key$Inputs:$$$$$CV$Growth 4.50%$$$$$CV$ROIC 8%$$$$$WACC 7.97%$$$$$Cost$of$Equity 8.38%

Fiscal+Years+Ending+Sep.+30 2015E 2016E 2017E 2018E 2019E 2020E

DCF)ModelNOPLAT 313 169 301 388 461 495Change$in$Invested$Capital 378 P234 P4 P67 68 94FCF P66 403 305 455 393 401Continuing$value 6250Periods$to$discount 1 2 3 4 5 5PV$of$FCF$discounted$by$WACC (61)$$$$$$$$$$$$$$ 346 242 335 268 4259Value)of)operating)assets 5,389))))))))))Plus$Investment$in$unconsolidated$entities 0Less$debt 80Less$Other$non$operating$liabilities 85Less$Minority$Interest 113Less$PV$of$operating$leases 32Value$of$equity 5079Shares$outstanding 108Intrinsic)value)(per)share))as)of)12/31/14 47.04

EP)ModelEconomic$profit$to$discount P168 P342 P192 P104 P26 3Continuing$value 79Periods$to$discount 1 2 3 4 5 5PV$of$FCF$discounted$by$WACC (156)$$$$$$$$$$$$ P293 P152 P77 P17 54PV$(Economic$Profit) (642)$$$$$$$$$$$$Plus$beginning$invested$capital 6031Value)of)operating)assets 5389Plus$Investment$in$unconsolidated$entities 0Less$debt 80Less$Other$non$operating$liabilities 85Less$Minority$Interest 113Less$PV$of$operating$leases 32Value$of$equity 5079Shares$outstanding 108Intrinsic)value)(per)share))as)of)12/31/14 47.04

Initnsic)value)per)share)as)of)today $48.21

Page 27

Hemlerich)PayneDividend'Discount'Model'(DDM)'or'Fundamental'P/E'Valuation'Model

Fiscal'Years'Ending'Sep.'30 2015E 2016E 2017E 2018E 2019E 2020E 2021E

EPS 2.78$....... 1.44$....... 2.59$....... 3.38$....... 4.05$....... 4.35$....... 4.35$.......

Key$Assumptions...CV.growth 5%...CV.ROE 8.8%...Cost.of.Equity 8.4%

Future$Cash$Flows.....P/E.Multiple.(CV.Year) 12.6.....EPS.(CV.Year) 4.35.....Future.Stock.Price 54.7.....Dividends.Per.Share 2.30 2.50 2.60 2.90 3.00 3.20.....Future.Cash.Flows 2.30 2.50 2.60 2.90 3.00 3.20 54.68$.....

1 2 3 4 5 6 6.....Discounted.Cash.Flows 2.12 2.13 2.04 2.10 2.01 1.97 33.73

Intrinsic)Value 43.98$)))))

Initnsic)value)per)share)as)of)today $45.07

Page 28

Hemlerich)PayneKey$Management$Ratios

Fiscal$Years$Ending$Sep.$30

Liquidity(RatiosCurrent'ratioQuick'ratioCash'ratio

Activity(or(Asset2Management(RatiosAccounts'Receivable'TurnoverInventory'TurnoverNet'Working'Capital'TurnoverFixed'Asset'TurnoverTotal'Asset'Turnover

Financial(Leverage(RatiosDebt/Equity'RationInterest'Coverage'Ratio

Profitability(RatiosGross'MarginsOperating'MarginsRoERoIC

Payout(Policy(RatiosDividend'Payout'Ratio

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

2.3 2.8 2.5 2.7 2.6 2.8 2.7 2.5 2.61.9 2.4 2.1 2.2 2.1 2.3 2.2 2.0 2.10.3 1.0 0.7 0.6 0.6 0.8 0.7 0.6 0.5

5.8 5.5 5.6 4.4 4.7 5.3 5.5 5.6 5.326.3 22.1 20.6 16.1 16.3 18.3 18.7 18.9 18.55.2 4.6 4.3 3.8 3.9 4.1 4.1 4.5 4.70.8 0.8 0.8 0.5 0.5 0.5 0.6 0.7 0.70.6 0.6 0.6 0.4 0.4 0.4 0.5 0.5 0.6

0.1 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1125.2 214.0 343.8 389.2 23.9 31.2 50.8 82.0 88.0

32.2% 31.9% 31.9% 20.9% 14.8% 19.5% 21.4% 22.6% 22.6%28.9% 28.2% 28.4% 16.7% 9.9% 15.1% 17.2% 18.7% 19.2%15.2% 16.6% 14.5% 6.0% 3.2% 5.7% 7.3% 8.4% 8.8%18.7% 12.9% 12.0% 5.2% 2.6% 4.9% 6.3% 7.6% 8.0%

5.4% 15.6% 40.0% 82.9% 173.7% 100.5% 85.7% 74.0% 73.5%

Documents

Henry Fund Report - HPtippie.biz.uiowa.edu/henry/reports15/HP_sp15.pdfPage!2! EXECUTIVESUMMARY$ Though& HP&is&one& of& the& best& managed and highly& profitable&company,&it&islikelyto&see&itsfortunesgoing&