Helmerich & Payne Down 16% in a Year: Is the Stock a Sell?
Shares of oil and gas drilling contractor Helmerich & Payne HP have lost around 16% of their value in the past year, contrasting with the sector's increase of 2.2%. The S&P 500 Index has risen 32.5% over the same timeframe.
HP One-Year Stock Performance
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Let’s now take a close look at Helmerich & Payne, with an eye on where it stands after falling so much, along with what we can expect going forward.
What’s Dragging Down HP Stock?
Investors seem to be worried about the declining rig count in North America and increased operational costs.
Declining U.S. Drilling Activity: Helmerich & Payne faces downward pressure due to declining U.S. drilling activity, exacerbated by efficiency gains in horizontal drilling. While longer laterals have increased production, the sector is using fewer rigs, limiting HP’s growth potential. With rig utilization at 62% as of July 2024 and public companies cutting back on drilling amid cost-cutting mergers, this trend could continue impacting HP's revenues.
Rising Expenses: Helmerich & Payne faces increased operational and administrative costs, impacting profitability. In the fiscal third quarter of 2024, direct operating costs surged due to higher startup expenses for new Saudi Arabian rigs, with costs revised from $5 million to $6-$8 million for the fiscal fourth quarter. Additionally, G&A expenses reached $67 million, exceeding expectations by $7 million due to acquisition-related fees. These rising costs, coupled with substantial capital expenditures, could strain margins and reduce overall profitability.
Competitive Pressures from M&A: The recent wave of mergers among large oil and gas producers, such as ExxonMobil's XOM $60 billion acquisition of Pioneer and Chevron's CVX $53 billion takeover of Hess, could lead to reduced drilling demand. As these companies streamline operations and cut costs, oilfield service providers like Helmerich & Payne may face pressure on day rates and contracts.
Falling EPS & Revenues: The Zacks Consensus Estimate for Helmerich & Payne’s fiscal 2024 sales and EPS implies a year-over-year drop of 4.3% and 15.7%, respectively. Moreover, HP is a component of the Zacks Oil and Gas Drilling industry, which currently ranks in the bottom 13% out of approximately 250 Zacks Ranked Industries. We expect this industry group as a whole to underperform the market over the next few months.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Helmerich & Payne’s Long-Term Prospects Encouraging
Despite near-term challenges, Helmerich & Payne is well-positioned for long-term growth on the back of several catalysts.
Permian Basin Growth Supports Production Stability: Helmerich & Payne remains a dominant driller in the U.S. Permian Basin, a key region for oil production. Despite industry challenges, HP benefits from its high utilization rates and increasing efficiency in drilling operations. The Permian's continued need for new drilling, combined with HP's technological advancements, ensures that it maintains a solid revenue stream from this vital oilfield region, contributing to long-term stability.
Accretive KCA Deutag Acquisition: Helmerich & Payne’s acquisition of KCA Deutag is transformative, expanding its international footprint and scale. The $1.97 billion deal, closing by year-end 2024, immediately enhances the company's cash flow and earnings visibility. With KCA’s significant presence in the Middle East and HP's growing international operations, the acquisition supports long-term revenue stability.
FlexRigs Key to Success: Helmerich & Payne’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.
Low Debt: HP’s debt-to-capitalization stands at just 16% compared with many of its peers that are hugely burdened with debts, accounting for around 50% of their total capital structure. The strong balance sheet coupled with the company’s robust cash flow and disciplined capital allocation, supports continued investment in growth opportunities and shareholder returns.
Our Take: Not Yet Time to Sell
From a valuation standpoint, if we look at the price/earnings ratio, Helmerich & Payne’s shares currently trade at 9.89 forward earnings multiple, well off its one-year high of 13.25 and below the median of 10.94. The company carries a Value Score of A.
Image Source: Zacks Investment Research
Out of the 13 brokers covering HP stock, three have Strong Buy recommendations and nine have a Hold rating, giving the company an average broker recommendation (ABR) of 2.69.
As the stock has fallen significantly during the past 12 months, the Zacks average price target of $42.18 is about 16% above the current levels.
We think that it's prudent to hang on to this Zacks Rank #3 (Hold) stock as of now.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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