Shares of oil and gas drilling contractor Helmerich & Payne HP slipped to a 52-week low of $31.98 per share on Aug. 30, before closing a tad higher at $32.60. Year to date, Helmerich & Payne has lost almost 10% of its value, contrasting with the sector's increase of 4.9%. Meanwhile, the S&P 500 Index has risen 18.4% over the same timeframe. The company has also fared worse than its peers like Nabors Industries NBR and Diamond Offshore Drilling DO.

YTD Price Comparison

Image Source: Zacks Investment Research

What’s Dragging Down HP Stock?

Investors seem to be worried about the declining rig count in North America and increased operational costs.

Lower Rig Count: Helmerich & Payne faces challenges from a declining rig count and maturing shale drilling. The North America Solutions segment saw its average contracted rig count drop to 150 in the fiscal third quarter of 2024 from 155 in the previous three-month period, reflecting slowing demand and contract churn. Additionally, the U.S. shale industry’s maturation has led to flattened production growth in key basins like the Permian. These factors could impact HP's revenue stability and long-term growth prospects.

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.

Falling Estimates: The Zacks Consensus Estimate for Helmerich & Payne’s fiscal 2024 sales and EPS implies a year-over-year drop of 4.4% and 14.2%, respectively. While the consensus mark for fiscal 2025 revenues points to a marginal rebound of 1.1%, the bottom line is expected to fall another 3.1% from the estimated fiscal 2024 projections.

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.

Advanced Rig Fleet: 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 United States and in drilling for oil and gas in international locations.

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.