Helmerich & Payne Faces Challenges as Stock Declines 16% Over the Past Year
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
Image Source: Zacks Investment Research
Let’s now take a close look at Helmerich & Payne, focusing on the reasons behind its recent struggles and what might lie ahead.
What’s Affecting HP Stock?
Investors appear concerned about the declining rig count in North America and rising operational costs.
Declining U.S. Drilling Activity: Helmerich & Payne is under pressure from decreasing U.S. drilling activity, worsened by efficiency improvements in horizontal drilling. Although longer laterals enhance production, fewer rigs are being utilized, limiting HP’s growth. Rig utilization stood at 62% as of July 2024. Furthermore, public companies are also reducing drilling in response to cost-cutting mergers, which could negatively affect HP’s revenues in the future.
Rising Expenses: Increased operational and administrative costs are pressing down on Helmerich & Payne’s profitability. In the fiscal third quarter of 2024, direct operating costs rose due to higher expenses for new Saudi Arabian rigs, with projections for the fiscal fourth quarter revised from $5 million to $6-$8 million. General and administrative costs also increased to $67 million, surpassing expectations by $7 million due to acquisition-related fees. These climbing costs, along with substantial capital expenditures, may impact profit margins.
Competitive Pressures from Mergers: The recent spree of mergers among major oil and gas producers, like ExxonMobil‘s $60 billion acquisition of Pioneer and Chevron‘s $53 billion takeover of Hess, could diminish drilling demand. As these companies streamline their operations, oilfield service providers such as Helmerich & Payne could experience pressures on day rates and contracts.
Falling EPS & Revenues: The Zacks Consensus Estimate for Helmerich & Payne’s fiscal 2024 revenues and earnings per share (EPS) suggests a year-over-year drop of 4.3% and 15.7%, respectively. Additionally, HP is part of the Zacks Oil and Gas Drilling industry, which currently ranks in the bottom 13% out of approximately 250 Zacks Ranked Industries. This group is expected to underperform the market in the near term.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Long-Term Prospects for Helmerich & Payne
Despite the immediate challenges, Helmerich & Payne remains positioned for long-term growth, driven by several key factors.
Permian Basin Growth and Stability: Helmerich & Payne is a leading driller in the U.S. Permian Basin, a critical area for oil production. Even with industry hurdles, HP benefits from high utilization rates and improving efficiency in its drilling operations. The ongoing demand for new drilling in the Permian, combined with HP’s technological advancements, allows the company to sustain a reliable revenue stream from this essential oilfield region.
Strategic KCA Deutag Acquisition: Helmerich & Payne’s $1.97 billion acquisition of KCA Deutag is a game-changing move that extends its international operations. Closing by the end of 2024, this deal enhances the company’s cash flow and earnings visibility. KCA’s significant footprint in the Middle East complements HP’s growing international endeavors, supporting long-term revenue stability.
Advantages of FlexRigs: Helmerich & Payne’s unique FlexRig design allows for faster movement than traditional rigs, enables quicker and more efficient drilling, and provides a safer operating environment. These rigs are better suited for today’s exploration demands, allowing HP to command higher day rates and utilization compared to other land drillers’ rigs.
Strong Financial Position: With a debt-to-capitalization ratio of only 16%, HP maintains a stronger financial footing than many peers who carry debts accounting for around 50% of their capital structure. This solid balance sheet, along with robust cash flow and disciplined capital management, better positions HP for ongoing growth and shareholder returns.
Conclusion: It’s Not Time to Sell Yet
From a valuation perspective, Helmerich & Payne shares currently trade at a forward price/earnings ratio of 9.89, well below its one-year high of 13.25 and the median of 10.94. The company holds a Value Score of A.
Image Source: Zacks Investment Research
Among the 13 analysts monitoring HP stock, three recommend Strong Buy, while nine suggest a Hold, resulting in an average broker recommendation score of 2.69.
As the stock has significantly declined over the past year, the Zacks average price target of $42.18 suggests an upside of about 16% from current levels.
It may be wise to hold onto this Zacks Rank #3 (Hold) stock for now.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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