INVESTMENT THESIS
Helmerich & Payne Inc. (NYSE: HP). Our rating reflects the impact of weak energy markets, muted drill rig activity, and more limited capital spending by the company’s core E&P customers, as they prioritize capital discipline and return on equity over production growth.
RECENT DEVELOPMENTS
On November 19, Helmerich & Payne reported an adjusted fiscal 4Q20 net loss (for the period ended September 30, 2020) of $78.7 million or $0.74 per share, compared to an adjusted net profit of $41.2 million.
The swing to a net loss was driven by operating losses in two of the company’s three business segments, as crude oil prices and drill rig activity fell sharply.
Fourth-quarter operating revenue was $208.3 million, down 68% from the prior-year quarter and down 34% from the previous quarter. In 4Q, HP incurred a restructuring charge of $552,000 (or $0.01 per share) related to the write-down of less capable rigs and excess equipment and inventory.
Helmerich & Payne has realigned its reporting structure and now reports results for three segments: North America Solutions, International Solutions, and Offshore Gulf of Mexico. We discuss fiscal fourth-quarter results for these segments below.
The North America Solutions segment posted an operating loss of $78 million, compared to an operating profit of $60 million in 4Q19. Average rig margins were down from the prior year, which more than offset lower operating expenses.
The International Solutions segment posted an operating loss of $3.5 million in 4Q19. The narrower loss reflected stronger drill rig revenue, aided by revenue reimbursements for prior projects. The results also included a $2.6 million foreign currency loss in the company’s South American operations.
The Offshore Gulf of Mexico segment posted 4Q operating income of $1.5 million.
For fiscal 2020, the company reported an adjusted loss from continuing operations of $0.99 per share, compared to adjusted EPS from continuing operations of $1.76 in fiscal 2019.
EARNINGS & GROWTH ANALYSIS
However, it does expect capital expenditures of $85-$105 million for the year, down from $141 million in fiscal 2020. Management also expects a year-end cash balance of $450-$500 million.
We are narrowing our fiscal 2021 loss estimate to $2.70 per share from $2.72. Our estimate reflects the impact of the pandemic and our lower revenue forecast for the year.
We are initiating a fiscal 2022 loss estimate of $1.74 per share, which assumes a diminishing impact from the pandemic but still tepid drill rig demand. The 2022 consensus calls for a loss of $1.76 per share.
FINANCIAL STRENGTH & DIVIDEND
Helmerich & Payne had total debt of $525.9 million at the end of 4Q19. The company has access to $750 million in liquidity under its new revolving credit facility.
The company ended the quarter with $577 million in cash and short-term investments (versus $348 million in 4Q19) and no amounts drawn on its $750 million revolving credit facility.
The company cut its annualized dividend from $2.84 to $1.00 per share in March 2020.
MANAGEMENT & RISKS
John W. Lindsay became CEO of Helmerich & Payne in March 2014, succeeding Hans Helmerich. Mr. Lindsay joined the company in 1987 as a drilling engineer. The Oil Services, Drilling and Equipment industry is one of the most volatile and unpredictable industries in the S&P 500. The main investment risk is the overall health of the global economy, though the industry also faces significant geopolitical risk.
COMPANY DESCRIPTION
Founded in 1920 and headquartered in Tulsa, Oklahoma, Helmerich & Payne is a petroleum contract drilling company focused on oil and gas well drilling.
VALUATION
We believe that the low multiples are warranted given prospects for continued low oil prices, weak E&P capital spending, and lower near-term demand for the company’s FlexRigs.
On November 27, HOLD-rated HP closed at $23.75, down $0.37.
Soruce: Argus
