Helmerich & Payne, Inc. HP looks compelling at the moment. Given the company’s strong fundamentals and positive estimate revisions, along with the present macro environment, it seems like this is the right time to add the stock to your portfolio.
Tulsa, OK-based Helmerich & Payne is engaged in the contract drilling of oil and gas wells in the United States and internationally. The company supplies drilling rigs, equipment, personnel, and camps on a contractual basis to explore and develop oil and gas from onshore areas, and from fixed platforms, tension-leg platforms, and spars in offshore regions. Notably, Helmerich & Payne currently has a Zacks Rank #2 (Buy), which means the company is poised to outperform the market.
Now let’s focus on the Oil and Gas - Drilling space to better understand the macro scenario, which makes buying shares of a drilling contractor like Helmerich & Payne beneficial. This is important because, often times, a rising tide will lift all boats in an industry, as there can be broad trends taking place in a segment that are boosting securities across the board. Out of more than 250 industries, the drilling space currently belongs to the top 34% of the Zacks Industry Rank, suggesting that it is well positioned to flourish.
The positive factors driving the drilling industry are:
Stabilizing Price: Oil prices have rallied more than 43% to above $60 per barrel level since hitting a 17-month low of $42.53 recorded last Christmas Eve. Consequently, work for onshore drillers has picked up again. Thanks to the emergence of major shale plays that yielded impressive results over the past few years, there has been an overwhelming requirement for complex drilling, leading to huge demand for new premium land rigs. The positive crude narrative and shale drilling frenzy have helped prop up growth prospects for land drillers.
Offshore Resurgence: Steadiness of oil prices at the current levels is driving operators to make longer-term plans, as deepwater projects become cost effective. Producers like Royal Dutch Shell plc RDS.A, which holds huge potential in the U.S. Gulf of Mexico, recently put up an interesting picture for investors at the Scotia Howard Weil Energy Conference in New Orleans. These companies expect offshore production to come out of the shadows of shale drilling. Another upstream company Hess Corporation HES pointed out that production of 120,000-barrel oil equivalent per day from the famous Permian Basin requires investment of around $12.8 billion, while equivalent production from the Liza Phase 1 project offshore Guyana necessitates $3.7-billion investment. The revival in production is likely to increase the demand for offshore drilling rigs.
With growth outlook for the drilling space looking healthy, investors can consider the current positivity in the segment as a buying opportunity. While the sector as a whole has bright prospects, Helmerich & Payne in particular offers good investment opportunities. The reasons are outlined below:
Efficient Drilling Fleet: Helmerich & Payne is a major land and offshore drilling contractor in the western hemisphere, having the youngest and most efficient drilling fleet. In particular, the U.S. land drilling business — the major contributor to the company's sales and earnings — enabled growth of its utilization and dayrates amid pricing improvements. The company expects activity in the U.S. land segment to increase 3-5% sequentially in the upcoming quarter.
Immune to Volatility: Helmerich & Payne’s technologically-advanced FlexRigs are the key to its success. These rigs help in increasing the company’s count of active rigs and maintaining relatively strong daily-rate margins even during times of market uncertainty. As it is, the contract driller is relatively immune to economic turmoil, as it has contracts with well-capitalized oil majors and larger independent companies. Term contracts and shale drilling demand for its rigs have helped Helmerich & Payne maintain a relatively high level of utilization.
Opportune Acquisitions: Helmerich & Payne's buyout of two rig-technology companies, namely MagVar and Motive Drilling Technologies, which focus on precise drilling and real time monitoring/evaluation, bodes well. The transactions have not only improved the company’s directional drilling performance, but also enabled Helmerich & Payne to drill wells more efficiently and accurately. The acquisitions are likely to give a boost to the company’s ‘H&P Technologies’ unit created in November 2018.
Balance Sheet Strength: The debt levels of Helmerich & Payne are not only low on an absolute basis but also on a relative basis. The company’s leverage stands at just around 10% compared with many of its peers that are hugely burdened with debts, accounting for around 50% of their total capital structure. The company’s low debt levels and high cash coverage reflect the ability to effectively utilize its borrowing to generate enough cash flow. Markedly, the company is a dividend aristocrat and has managed to hike its payout in each of the last 47 years.
Bottom-Line Prospects: Over the past 60 days, three analysts have upwardly revised earnings estimates for 2019. The Zacks Consensus Estimate for 2019 has been revised upward from $1.61 per share to $1.64, which is significantly higher than the year-ago figure of 14 cents. For first-quarter 2019, the bottom line is expected to surge from the year-ago loss of 5 cents to earnings of 38 cents per share.
A clear picture can be derived from the above-mentioned growth drivers, which differentiate Helmerich & Payne from peers. Its efficient drilling fleet, technologically-advanced FlexRigs, favorable buyouts and strong balance sheet will enable it to achieve top and bottom-line improvements amid secular growth in the drilling space.
Another Stock to Consider
Investors interested in the energy sector can opt for another top-ranked stock as given below:
Houston, TX-based Key Energy Services, Inc. KEG is an onshore rig-based well servicing contractor. Its bottom line in 2019 is expected to increase 33.6% year over year. The stock currently has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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