More Pain To Come For Helmerich & Payne

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Feb 13, 2015

Helmerich & Payne (HP, Financial), which operates in the onshore drilling segment, has been a value creator in the past through stock appreciation and high dividends. Even at a current price of $65.96, Helmerich & Payne offers a dividend yield of 4.1% and a dividend payout of $2.75 per share. While the dividend metrics are good and the dividend might sustain in 2015, Helmerich & Payne is unlikely to grow at a robust pace in the coming quarters and this will send the stock lower. This article discusses the key reasons to be bearish on Helmerich & Payne in the near-term. I must point out here that whenever oil prices recover, Helmerich & Payne will be among the stock to watch out for in terms of upside potential. However, the gloomy market sentiments will impact the stock in the coming months. I had written earlier on Helmerich & Payne with a bearish view and I am writing again with a focus on the company’s latest quarterly results.

From the company’s latest result announcement, the first negative point is the sharp decline in the number of rigs with term-contracts. This is a negative factor as lower term-contracts reduces the revenue visibility and increases the uncertainty related to revenue and EBITDA. The active rigs and rigs under term contracts for Helmerich & Payne was 294 and 177 as of Dec. 31, 2014. On the day Helmerich & Payne reported its quarterly results (January 29, 2015), the number of active rigs and rigs under term contracts had declined to 243 and 162, respectively. Therefore, the decline has been rapid in the month of January and I expect this trend to continue in the coming months with oil prices remaining lower.

Another point that I want to add here, which underscores the point that the company’s active rigs and rigs on term contracts will continue to decline is the latest rig count data by Baker Hughes. US rig count declined by 87 according to the latest data and this is the 10th straight decline in rig count in the United States. Therefore, the trend is clear for the near-term and it is also clear that the rig count will continue to decline or remain at lower levels as long as oil prices remain at current levels.

In my view, investors need to wait for termination notices in 1Q15 and 2Q15 for term-contracts. I am considering the first two quarters of 2015 because oil inventory is likely to remain high in 1H15 and this will be a challenging time for the company. For the second half of 2015, I expect oil to gradually trend higher. The second reason for considering 1H15 important is the point that most of the capital expenditure revisions for oil and gas companies will happen in 1H15. The rig count decline will therefore be minimal in 2H15 or the rig count can potentially increase based on oil prices. The real challenge is the first two quarters of 2015.

I must also add here that Helmerich & Payne is a zero-debt company and the company has excellent fundamentals to navigate through the crisis. I don’t expect a financial crisis for the company even if oil prices were to remain at lower levels through 2015. However, the stock will still remain depressed based on the market conditions and its impact on the company’s operating rigs. I must also mention as a positive that Helmerich & Payne has a modern fleet of rigs and when market conditions improve, the company will be best positioned to rapidly increase its rig utilization.

In conclusion, considering the positives, Helmerich & Payne should be on investor’s radar for the long-term. However, I believe that there will be better entry levels for the stock 3-6 months down the line.