There was significant pain for Helmerich & Payne (HP, Financial) and other onshore drilling stocks in the early part of 2016. As oil bottomed out in January 2016, Helmerich & Payne started witnessing some momentum that was backed by excellent fundamentals. After a sharp rally since September 2016, Helmerich & Payne is now higher by 73% in the last 12 months.
Even after significant upside, I am bullish on the stock for 2017. Of course, the basis of the discussion is that oil prices will continue to trend higher in 2017, and I am optimistic that oil will potentially move above $60 per barrel in the next few months. It is worth noting here that in the last few instances of production cuts by OPEC, oil has seen positive momentum for the next 12 to 24 months. If this holds true, the thesis is likely to pan out well.
Coming to company-specific factors, as oil trends higher, there is already indication of meaningful recovery in the company’s onshore rig activity. Just to put things into perspective, Helmerich & Payne had 87 active rigs as of third-quarter 2016. This swelled to 117 active rigs as of Dec. 7, 2016. I expect this positive momentum to continue.
As oil and gas companies report their annual earnings and provide early guidance for fiscal 2017 in terms of their capital expenditure outlook, I expect Helmerich & Payne to move higher as it is likely that onshore rig activity will increase.
It is also worth mentioning that the number of rigs in the spot markets has been on a steady increase since September 2016, and Helmerich & Payne mentioned in its December 2016 presentation that spot rates might start improving after a 35% drop from peak rates. I expect first signs of EBITDA margin expansion for Helmerich & Payne from second-quarter 2017 with the company slated to report first-quarter 2017 earnings on Jan. 26. If the upcoming results do provide enhanced EBITDA guidance (likely), Helmerich & Payne stock will move higher.
While probable spot market recovery is a positive, Helmerich & Payne has an average of 85 rigs under term contract for first-quarter 2017 with an average of over 80 rigs likely to be in term contract through 2017. This will ensure clear revenue and cash flow visibility.
If oil does move above $60 per barrel and sustains at those levels, I expect term contracts to increase in the second half of 2017. These developments will be positive for Helmerich & Payne from a sustained stock upside perspective.
From a balance sheet perspective, I like Helmerich & Payne for the fact that its total debt to capitalization is less than 10%, which happens to be the best among peers. Low leverage allows Helmerich & Payne to utilize the cash flows for robust dividends. Helmerich & Payne currently offers a dividend of $2.8 per share, and I expect a potential dividend increase in the second half of 2017 if the above points discussed hold true.
Helmerich & Payne also holds an edge over peers when it comes to the quality of assets. The company has a leading share in U.S. land 1,500 hp AC drive rigs. As of December 2016, the company had 25% market share in US AC drive rigs followed by 16% market share for Nabors Industries (NBR, Financial) and 15% market share for Patterson-UTI Energy (PTEN, Financial). As industry sentiments improve, Helmerich & Payne seems best positioned to capitalize on the upturn with significant financial flexibility being a key supporting factor.
Helmerich & Payne is likely to see more upside in the next 12 months even after the big surge in 2016. Fresh exposure to the stock can be considered on any broad market correction.
Disclosure: No positions in the stocks discussed.
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