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We are maintaining our long-term Neutral recommendation on Helmerich & Payne Inc ( HP - Analyst Report ) . The company is characterized by a high-quality and varied drilling base, strong financial structure and impressive backlog. However, these positive aspects are partially negated by the weak macro environment and operational disruptions.
Tulsa, Oklahoma-based Helmerich & Payne is a major land and offshore drilling contractor in the western hemisphere, having the youngest and most efficient drilling fleet. The company specializes in shallow-to-deep drilling in oil and gas-producing basins of the U.S. and in drilling for oil and gas in international locations.
For the second quarter of fiscal 2012, the company posted soft results, with earnings per share missing the Zacks Consensus Estimate and revenue beating our projection. The quarter’s performance was positively influenced by sound U.S. land drilling and better utilization rates. On the other hand, weak offshore business and steeper operating costs somewhat weighed down on the company results.
Looking ahead, we remain positive on the U.S. land rig market and expect the rig count to remain around 2,000 during the foreseeable future, spurred by oil-directed activities. As drilling picks up, buoyed by demand recovery, there will be a surge in demand for Helmerich & Payne’s services during the next few quarters.
Additionally, Helmerich & Payne’s technologically advanced FlexRigs will likely contribute immensely toward its success. This will help the company to increase its count of active rigs and maintain relatively strong daily-rate margins even during times of market uncertainty. The company’s proprietary FlexRig design makes the rigs move faster than conventional rigs, drill quicker and more efficiently, and allows for a safer operating environment.
However, as inherent to all other energy companies, Helmerich & Payne remains exposed to the volatile oil and gas prices. Any significant reduction in energy prices could disrupt the level of exploration and production activity, resulting in a corresponding decline in demand for the company’s services.
With operations that spans across the globe, Helmerich & Payneis highly exposed to international business risks such as embargoes and expropriation of assets, exchange rate risks, terrorism, and political or civil turmoil.
We also anticipate that investor sentiment towards the company will stay lukewarm, considering Helmerich & Payne’s below par dividend yield and miniscule payout.
Hence, we expect the company to perform on par with other industry players such as Noble Corp. ( NE - Analyst Report ) and Ensco plc ( ESV - Analyst Report ) . Helmerich & Payne currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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