Helmerich & Payne, Inc.
/ (HP-NYSE)/ Equity Research / HP | Page 1
Current Recommendation / UNDERPERFORM
Prior Recommendation / Neutral
Date of Last Change / 03/06/2015
Current Price (03/05/15) / $68.12
Target Price / $62.00
SUMMARY
As crude gets deeply entrenched into a bearish territory and revolves around the $50-a-barrel level following OPEC's decision to hold production unchanged, the effects of booming shale supplies in North America and a stagnant European economy. Subsequently, top energy companies are expected to cut spending (particularly on the costly upstream projects) on the back of lower profit margins. This, in turn, means less work for contract drillers like Helmerich & Payne. Consequently, we see the company as a risky bet that ordinary investors should exit./ Equity Research / HP | Page 1
SUMMARY DATA
52-Week High / $118.2952-Week Low / $57.46
One-Year Return (%) / -27.29
Beta / 1.50
Average Daily Volume (sh) / 2,278,208
Shares Outstanding (mil) / 108
Market Capitalization ($mil) / $7,333
Short Interest Ratio (days) / 3.41
Institutional Ownership (%) / 87
Insider Ownership (%) / 4
Annual Cash Dividend / $2.75
Dividend Yield (%) / 4.04
5-Yr. Historical Growth Rates
Sales (%) / 19.1
Earnings Per Share (%) / 25.6
Dividend (%) / 88.9
P/E using TTM EPS / 10.7
P/E using 2015 Estimate / 18.2
P/E using 2016 Estimate / 29.5
Zacks Rank *: Short Term
1 – 3 months outlook / 5– Strong Sell
* Definition / Disclosure on last page
Risk Level * / Above Avg.,
Type of Stock / Large-Value
Industry / Oil&Gas-Drill
Zacks Industry Rank * / 240 out of 267
OVERVIEW
Incorporated in 1940, Helmerich & Payne Inc. (HP) is engaged in the contract drilling of oil and gas wells in the U.S. and internationally. The company supplies drilling rigs, equipment, personnel, and camps on a contractual basis to explore for and develop oil and gas from onshore areas and from fixed platforms, tension-leg platforms, and spars in offshore areas. Helmerich & Payne’s contract drilling business consists of three reportable business segments: U.S. land drilling, offshore drilling and international land drilling.
- U.S. Land Drilling: As of fiscal 2014 end (twelve months ending Sep30, 2014), the company’s U.S. land drilling business consisted of 329 rigs available for work. Helmerich & Payne conducts its domestic land drilling primarily in Oklahoma, California, Texas, Wyoming, Colorado, Louisiana, Mississippi, Pennsylvania, Utah, Arkansas, New Mexico, and North Dakota. During fiscal 2014, U.S. land operations contributed approximately 83% of the company’s operating revenues.
- Offshore Drilling: The domestic offshore drilling unit’s key assets include 9 platform rigs (8under contract). Helmerich & Payne carries out offshore drilling in the Gulf of Mexico, offshore of California, Trinidad, and Equatorial Guinea. This unit contributed 7% of operating revenues in fiscal 2014.
- InternationalLand Drilling: The international land segment is active in Ecuador, Colombia, Argentina, Bahrain and Tunisia. It has 36 rigs, including 14 in Argentina, 8 in Columbia, and 6 in Ecuador. In fiscal 2014, international land drilling accounted for 10% of Helmerich & Payne’s operating revenues.
Additionally, Helmerich & Payne is involved in the ownership, development, and operation of commercial real estate properties, as well as the research and development of rotary steerable technology. The company’s property portfolio includes a shopping center and multi-tenant industrial warehouse properties, as well as approximately 210 acres of undeveloped real estate land.
REASONS TO SELL
As crude gets deeply entrenched into a bearish territory and revolvesaround the $50-a-barrel level, the top energy companies have resorted to spending cuts (particularly on the costly upstream projects) on the back of lower profit margins. This, in turn, means less work for drilling contractors like Helmerich & Payne. Investors should consider this point before buying the company’s shares.
The pace of new term contract orders have weakened considerably, while newbuild awards have also been hard to come by due to flat rig demand and stiff price competition. This will continue to weigh on the company’s fortunes in the near-to-medium term.
Helmerich & Payne has operations in several international regions, which accounted for approximately a tenth of its consolidated operating revenues during fiscal 2014. As such, the company is exposed to risks associated with doing business abroad. Such risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment.
The company’s operations are subject to a number of operational risks, including inclement weather, blowouts and well fires. These hazards could adversely affect Helmerich & Payne’s drilling operations and seriously damage/destroy the equipment involved, thereby reducing the company’s revenues, earnings and cash flows.
RISKS
Helmerich & Payne is a major land and offshore drilling contractor in the western hemisphere, having the youngest and most efficient drilling fleet. The company specializes in shallow to deep drilling in oil and gas-producing basins of the U.S. and in drilling for oil and gas in international locations. Helmerich & Payne remains relatively unscathed from any economic turmoil, as the company’s major work contracts are with well capitalized oil majors and the larger independent oil companies. Additionally, term contracts and shale drilling demand for its rigs have helped Helmerich & Payne maintain a relatively high level of utilization.
We believe Helmerich & Payne’s technologically-advanced FlexRigs are the key to its success, helping to increase its count of active rigs and maintain relatively strong daily-rate margins even during times of market uncertainty. The company’s proprietary FlexRig design makes the rigs move faster than conventional rigs, drill quicker and more efficiently, and allows for a safer operating environment. As such, these are better suited for the new demands of the exploration business and, therefore, command higher dayrates and utilization than rigs from other land drillers.
Furthermore, Helmerich & Payne’s strong contract drilling backlog, which now stands at around $5 billion, not only reflects steady demand from its customers but also offers long-term earnings and cash flow visibility.
RECENT NEWS
First Quarter 2015 Results
On Jan29, 2015, Helmerich & Paynereported better-than-expected earnings for the first quarter of fiscal 2015 (three months ended Dec 31, 2014), aided by strong results from its U.S. Land Operations and Offshore Operations segments.
Earnings per share from continuing operations (excluding special items) came in at $1.70, surpassing the Zacks Consensus Estimate of $1.57. The bottom line also showed improvement from the year-ago level of $1.56.
Revenues of $1,056.6 million were up 18.8% from the prior-year quarter and also came above the Zacks Consensus Estimate of $974 million.
Segment Performance
U.S. Land Operations: During the reported quarter, operating revenues totaled $890 million (84% of total revenue), up 21.6% year over year. Average rig revenue per operating day was $29,457, which was 3.5% above the year-ago period, while average rig margin per day increased 5.6% to $16,411.Also, rig utilization levels rose to 89% (from 84% in the first quarter of fiscal 2014), increasing the segment operating income by 26.8% from the year-earlier quarter to $318.1 million.
Offshore Operations: Helmerich & Payne’s offshore revenues were up 17.6% year over year to $69.5 million. However, daily average rig revenue fell 11.2% to $55,341, while average rig margin per day decreased 24.5% to $20,732. Meanwhile, rig utilization was up 98% from the year-ago quarter level of 89%. This helped the segment operating income improve by 16.1% from the year-ago period to $21.5 million.
International Land Operations: Helmerich & Payne’s international land operations recorded revenues of about $93 million, down from $95.3 million in the previous-year quarter. Average daily rig revenue was $39,987, up 4.1% from the corresponding period last year, while rig margin per day was $10,770, higher than the $10,342 a year ago.
Rig utilization, however, plunged to 63% from the prior-year period level of 82%. Segment profitability took a downward trajectory, coming down to $12.2 million, from $12.8 million in the first quarter of fiscal 2014.
Capital Expenditure & Balance Sheet
During the quarter, Helmerich & Payne spent approximately $369 million on capital programs. As of Dec 31, 2014, the company had approximately $251.6 million in cash, while long-term debt stood at $40 million (debt-to-capitalization ratio is below 1%).
Guidance
The company expects activity in the U.S. land segment to fall by 25% sequentially during the fiscal second quarter. Moreover, the average rig revenue per day is likely to fall to the $27,000–$27,500 range. Daily average rig cost is expected to rise to approximately $13,350 in the next quarter.
As for the offshore segment, Helmerich & Payne anticipates the average rig margin per day to be around $19,500 during the second quarter of fiscal 2015 while revenue days are expected to remain flat sequentially.
Lastly, the international land segment will likely experience a fall of 10–15% in revenue days and average rig margin per day is expected to decrease 25–30% in the next quarter.
Helmerich & Payne’s fiscal 2015 capital expenditures are targeted to be around $1.3 billion.
VALUATION
The unprecedented oil slide has rocked contract drilling companies such as Helmerich & Payne, as they grapple with fewer orders from explorers that are looking to cut capital expenditure. These factors are reflected in our new Underperform recommendation.
Helmerich & Payne’s current trailing 12-month earnings multiple is 10.7X, compared with the 8.0X industry average and 18.3X for the S&P 500. Over the last five years, Helmerich & Payne’s shares have traded in a range of 8.9X to 22.3X trailing 12-month earnings.
Our $62 price objective is based on a 2015 P/E multiple of 16.6X.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of HP. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1128 companies covered: Outperform - 15.5%, Neutral - 75.4%, Underperform – 8.3%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Analyst / Nilanjan ChoudhuryQCA
Lead Analyst / Nilanjan Choudhury
Nilanjan Choudhury
Reasons for Update / 1Q’15 Earnings Update & Recommendation Change
/ Equity Research / HP | Page 1