I have been neutral to negative on Helmerich & Payne (HP, Financial) since the steep decline in oil and gas prices translated into lower onshore and offshore drilling activity. However, in this article, I change my view from neutral to positive for the long term. In line with this view, I believe that Helmerich & Payne is worth accumulating at current levels. This article discusses the triggers that will translate into upside for Helmerich & Payne in the coming years.
The first reason to change my overview on Helmerich & Payne is the latest rig count data and the rig count data in the last few weeks. The number of rigs in the United States increased by three to 862 according to the latest rig count data as of July 2, 2015. Before this, the rig count decline had moderated in the last few weeks and there is a clear trend of onshore rigs count bottoming out. Crude oil prices have also been sideways in the recent past after trending higher from 2015 lows of $45 per barrel. While supply from Iran still remains a risk, I do believe that crude oil prices have bottomed out in January 2015. Therefore, with rig count likely to remain stable, onshore rig service providers will see some respite in the coming quarters.
Coming to the company specific factors, a solid balance sheet is the first reason to consider exposure to Helmerich & Payne among onshore rig service-providing companies. As of March 2015, the company had a total cash position of $719 million with a debt of just $533 million. Therefore, the company is debt free on a net-debt basis. It is also important to mention that, even in difficult market conditions, Helmerich & Payne generated $813 million in operating cash flow for the first six months of FY15. Overall, the financial position can be rated as “excellent” and I wanted to focus first on the financials as the company can navigate challenging industry conditions with ease even if markets remain depressed for the coming quarters.
It is important to mention that, for the third quarter of 2015, the company’s revenue per day is expected to decrease to roughly $26,500. However, the average rig expense per day is expected to be roughly $14,300. In other words, the company will generate relatively strong EBITDA and cash flow in the coming quarters as well.
Another recent trend that might be positive for Helmerich & Payne is the fact that the number of active rigs in the spot market increased from 26 on May 15, 2015 to 31 on June 19, 2015. An increase in activity spot market rigs is an indication that oil and gas companies might just be starting to contract rigs on a temporary basis as the industry outlook improves. For 3Q 2015, the number of rigs under term contracts is likely to be 147.1 and it is likely to decline to 135.6 for 4Q 2015. Once there is more conviction on oil prices trending higher, term contracts are likely to increase.
I also like Helmerich & Payne considering the fact that the company’s rigs are primarily AC Drive FlexRigs. In the coming quarters and years, the market share for mechanical rigs will sharply decline and the market share for AC Drive FlexRigs will increase. Helmerich & Payne is well positioned from this perspective also considering the fact that the company has a leading market share of 16% in the United States followed by a market share of 13% for Patterson-UTI Energy (PTEN, Financial). From a dividend and balance sheet perspective, I like Helmerich & Payne with the company offering a dividend payout of $2.75 per share (yield of 3.9%) as compared to Patterson-UTI Energy’s dividend payout of $0.4 per share (yield of 2.1%).
In conclusion, I view Helmerich & Payne as an excellent long-term investment opportunity and I believe that the stock can be a part of the portfolio for stock upside as well as consistent dividends. I would like to emphasize here that Helmerich & Payne has moved sideways in YTD15 and the stock can drift sideways for longer. Therefore, the idea behind this article is not near-term trading, but long-term investing exposure to the stock. Once oil and gas prices resume the uptrend, I believe that Helmerich & Payne will be among the best stocks in the onshore rig services sector from a returns perspective.
