Helmerich & Payne’s (HP) management believes that HP’s strong balance sheet and long-term contracts will help it to survive the energy market downturn. HP produces high-quality AC (alternating current) rigs, which replace the legacy SCR rigs (or diesel powered rigs) in the United States.
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In its fiscal 4Q15 press release, HP’s chief executive officer (or CEO) John W. Lindsay commented, “In many respects, this downturn has been indiscriminate of rig quality as evidenced by the number of Tier 1 rigs on the sideline. Even with some of the best rigs idle, there is still evidence that replacement cycle is ongoing.”
Lindsay continued, “A year ago, approximately 41% of the active rigs were AC drive. And today, approximately 58% of the active rigs in the U.S. are AC drive rigs, with the remaining 42% of the active rigs made up of a legacy fleet of SCR and mechanical rigs that continue to be less relevant as the cycle wears on.”
In fiscal 1Q16, HP’s management expects the company’s average rig revenue per day to slightly fall to ~$26,000. In fiscal 4Q15, its average rig revenue per day was $29,000. HP’s management also expects prices for some of its long-term contracts to improve.
Juan Pablo Tardio, HP’s chief financial officer (or CFO), said in the fiscal 4Q15 conference call, “Some of the mutually beneficial negotiations of long-term contracts that resulted in reduced day rates in exchange for additional term durations at fully-priced levels have now transitioned back to those fully-priced levels. As a result, the average pricing for rigs that are already under term contracts is expected to slightly increase and remain strong during the next several quarters as some rigs roll off and newbuilds are deployed.”
Given the unpredictability of energy price recovery, Wall Street analysts have divergent opinions about HP’s target price in the next 12 months. While the lowest target price for HP is $40, the highest is $78. The median target price for HP, surveyed among the sell-side analysts, is $56.8.
HP is currently trading at $53.5, implying a 6% upside at its median price. Patterson-UTI Energy (PTEN), a smaller market cap contract driller, received a $17.4 median target price. This, relative to its current price of ~$60, implies a 16% upside. HP makes up 0.47% of the Energy Select Sector SPDR ETF (XLE).
Next, we’ll discuss HP’s revenue and earnings.