With oil trading above $50 per barrel, there are hopes for gradual recovery in the energy industry.
Helmerich & Payne (HP, Financial), which operates onshore rigs, has trended higher by 27% year to date. Considering a time horizon of six to 12 months, I see further upside for this stock.
Starting with the industry perspective, oil trades at $51 per barrel, and I expect it to trend higher in the coming quarters as OPEC is likely to cap production to manage its finances. Geopolitical tensions are also supportive of higher oil prices. Above $50 per barrel, oil and gas exploration companies are accelerating their investments, and the outcome is likely to be a steady increase in rig count going forward.
Just to put things into perspective, Helmerich & Payne had an average of 161 active rigs in third-quarter 2015, which consistently declined to 87 active rigs by the third quarter of this year (the company’s third quarter ended in June). However, the number of rigs in operation has gradually moved higher and as of October, the active rigs stand at 96. This is a clear reflection of gradual recovery in the onshore rig market and as oil continues to move higher, I expect better days for the onshore rig industry.
For Helmerich & Payne, another important point to note is that the company has 47 active rigs in the Permian Basin out of the total active rigs of 96. With strong activity in the Permian Basin even at depressed oil prices, Helmerich & Payne has been in the right asset.
For the company’s fleet deployment, another important point to note is that Helmerich & Payne has 66 rigs active rigs on term contract (U.S.) as of October. This reduces the risk as rigs in the spot market are more prone to earnings volatility. If oil sustains at higher levels, exploration companies will have higher confidence to award term contracts; I see that happening in the coming quarters.
Let's shift focus to the company’s fundamentals, which is another reason to be bullish on the stock. Emerging from challenging times, Helmerich & Payne has maintained robust fundamentals with cash in hand of $907 million as of June 30 coupled with a total debt-capitalization ratio of 10%.
Besides the point that Helmerich & Payne will have sufficient financial muscles for growth, the company offers a dividend yield of 4.1%, which is sustainable in the foreseeable future. With term contracts, improving industry conditions and strong fundamentals, Helmerich & Payne is well positioned to potentially increase dividends in the coming quarters if the price of oil continues to move higher.
Coming back to the company’s rigs, another factor that separates Helmerich & Payne from peers is the fact that the company has the highest number of “AC Drive” rigs, and the markets have been shifting toward these rigs and away from SCR Rigs or Mechanical Rigs. With Helmerich & Payne having the largest number of AC Drive rigs along with being the market leader in onshore rigs in the U.S., I see the company as positioned for a strong recovery as industry conditions improve.
Overall, Helmerich & Payne is worth considering at current levels as the industry witnesses gradual recovery. Strong fundamentals, robust dividend payout and a quality rig base makes Helmerich & Payne stand out among peers.
Disclosure: No positions in the stock.
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