We are maintaining our long-term Neutral recommendation on Helmerich & Payne Inc (HP), owing to its superior and diversified drilling fleet, healthy financial profile and strong contract drilling backlog, partially offset by the unstable oil and gas fundamentals and operational hindrances.
Tulsa, Oklahoma-based 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.
During the first three months of 2012, Helmerich & Payne performed impressively and posted earnings per share from continuing operations (excluding special items) of $1.29, comfortably surpassing the Zacks Consensus Estimate of $1.16 and way above the year-ago adjusted profit of 94 cents. The results were aided by a robust U.S. land drilling business.
Additionally, we believe that Helmerich & Payne’s technologically advanced FlexRigs are the keys to its success, helping it to increase the count of active rigs and maintain relatively strong daily-rate margins even amid the prevailing uncertain period. The company’s strong contract drilling backlog, which now stands at nearly $4.2 billion, not only reflects steady demand from its customers but also offers long-term earnings and cash flow visibility.
We also believe that the company’s modest capital expenditure requirements and strong balance sheet have been real assets in this highly uncertain period for the economy. As of December 31, 2011, Helmerich & Payne’s debt-to-capitalization ratio was as low as 6.4%, thereby exposing it to less financial risk.
However, as a company operating in the energy sector, Helmerich & Payne remains exposed to the volatile oil and gas prices. Any significant reduction in energy prices could disrupt the level of exploration and production activity, resulting in a corresponding decline in demand for the company’s services.
Moreover, there exists a glut in domestic gas supplies, with storage levels remaining significantly above their five-year average. This will continue to weigh on natural gas prices in the near-to-medium term. Helmerich & Payne, which specializes in shallow to deep drilling in gas producing basins of the U.S., remains particularly exposed to this situation.
We also expect investor sentiment toward the company to remain lukewarm, considering Helmerich & Payne’s below par dividend yield and miniscule payout.
Hence, we expect the company to perform on par with other industry players such as Noble Corp. (NE) and Ensco plc (ESV). Helmerich & Paynecurrently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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