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Can a New Contract Curb Market Trends in Favor of Helmerich & Payne?
Posted by: Vanina Egea (IP Logged)
Date: March 28, 2014 05:12PM
The will to exploit the Vaca Muerta prospect by the Argentine government is offering oil and gas producers around the globe an opportunity for growth. The call is particularly interesting since YPF had been expropriated from Spanish based Repsol in 2012, and international companies seemed to be shut off from investing in the oil and gas industry in Argentina. However, a groundbreaking accord had been signed with Exxon Mobil (XOM) the following year, opening the door to other international investors and equipment providers. One of the most recent firms to enter the Vaca Muerta prospect is Halmerich & Payne (HP). The agreement between the Argentine owned YPF (YPF) and the drilling company stipulates the deploying of ten FlexRigs currently located in the U.S. Will the announcement stop gurus from continuing dropping the stock? What are the long-term prospects for the company after the new announcement?
The New Agreement in Context
The agreement with YPF comes as a sort of relief for Helmerich & Payne. Not because the company is in financial trouble; it is more of an opportunity to counter declining performance in North America. The fracking boom in the U.S. is already gone and with maturing wells on the rise, the industry is shifting towards offshore activities. Hence, an opportunity abroad has the double benefit of taking operations away from North America and the shortly congested Mexican Gulf.
Another positive note for Helmerich & Payne is the ordering of 35 new FlexRigs with four different exploration and production companies. In other words, the company counts with an important backlog and a diverse source of clients. Both characteristics will serve well for future growth as the company secures multi-year contracts and attractive economic returns.
Overall performance has already been hit by developing market trends. For example, average onshore rig revenue per day is already flat while average rig expense per day is expected to increase.
A similar situation is being observed for offshore activities as competition continues to tighten. Should the trend strengthened, given the company's existing fleet of 315 land rigs in the U.S., 29 international land rigs and nine offshore platform rigs, overall performance can take a deep dive. Hence, new opportunities like the Vaca Muerta prospect can offer an escape valve from lagging regions and highly competitive regions.
What Analysts See
Prospects for Helmerich & Payne are mixed due to the current risk associated with the firm and declining performance. Those fears have been fueled by CEO John W. Lindsay’s sale of 7,058 shares on the open market in a transaction dated Thursday, March 27. Having disposed of almost 10% of his interest on the firm is not a good sign to investors at this point. Nevertheless, David Bartosiak, an analyst at Zacks considers the stock today’s (March 28) bull.
So far, Helmerich & Payne has been immune to economic turmoil because major work contracts are with well-capitalized oil majors and the larger independent oil companies. That has helped the company to squeeze the juice out of its successful and technologically advanced FlexRigs, a product that allowed it to construct a business based on modest capital expenditure requirements, resulting in a strong balance sheet, utilized to create value for shareholders through generous dividend payments.
Currently trading at 15.6 times its trailing earnings, Helmerich & Payne’s stock carries a 28% premium to the industry average. With increasing revenues and net income, and great debt improvement during the last three years, the stock is all the more tempting thanks to the model’s strong cash flow. However, the entry point at a discount has passed and there are serious doubts on whether overall performance will be overturned. A single contract will not do it and gurus stopped making strong purchases of this stock around July 2013.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
Stocks Discussed: HP,