Helmerich & Payne (HP, Financial) is a provider of onshore drilling services primarily in United States. The stock currently trades at $59.46 and offers a dividend yield of 4.2%. From a 2014 peak of $118.29 on July 3, 2014, the stock has slumped by 50%. However, the downside for the stock is still not over and this article discusses the reasons to be bearish on Helmerich & Payne.
The first reason to be bearish on the stock is lower oil prices. Oil is currently trading below $50 per barrel and I expect that oil will trade at lower levels at least for the first half of 2015.
The reason is that there is a huge supply glut globally and it will ensure that oil does not sure from current levels.
Another reason for oil staying lower is a global economic slowdown with Euro-Area and China being the worst impacted. As a result of a slowdown in the euro-area, the dollar is also gaining strength and a strong dollar is also negative for oil prices.
Therefore, the oil price factor remains the dominant reason for being bearish on Helmerich & Payne for 2015. U.S. companies oil and gas companies have already started cutting their capital expenditure plan for 2015, and I expect further decline in oil and gas investments as oil trades at sub-50 levels.
Lower investments will translate into lower rig utilization and more idle rigs. With Helmerich & Payne being the market leader in U.S., the impact will be significant in the coming quarters and the stock will move lower as rig utilization declines meaningfully.
Another reason for being very bearish on Helmerich & Payne is the fact that the company has a large number of rigs in the spot markets.
As of December 2014, the company has 114 rigs that were in the spot market. When market conditions are robust, it is good to have rigs in the spot market as the day rates will be higher. However, when the market conditions are not favourable, high number of rigs in the spot markets means lower utilization, lower day rates and a decline in EBITDA margin.
Therefore, over the next few quarters, Helmerich & Payne is likely to witness lower revenue coupled with EBITDA margin compression. The company’s financial position is strong and Helmerich & Payne is almost a debt free company.
The concern is therefore not related to the company’s survival, the concern is more related to the company’s near-term revenue and EBITDA slump and its impact on stock price.
I would also like to mention that the company’s dividend payout of $2.75 still looks sustainable as the company is almost debt free. However, as the stock can decline further, the dividend gains will be offset in 2015.
Helmerich & Payne also does not look terribly expensive at an EV/EBITDA valuation of 4.2 and a forward PE (September 2016) of 10.6. However, investors need to consider the commodity factor more than the company specific factor and the commodity price factor is pointing to more downside for the stock in the coming months. I therefore recommend that investors stay away from the stock for the next 1-2 quarters for better entry levels.
